Larger or Smaller Down Payment on a Home Loan

What’s better a Larger or Smaller Down Payment when you are buying a home and get a home mortgage. The simple answer is that it depends.

Q: If I buy a home and put down $30,000 and then wait until the end of the year and pay another $30,000 toward the principal owed on the loan, would there be a bigger benefit than if we simply put down $60,000 more for our down payment?

And if we put down more cash, how would this change the rates we might pay now and in refinancing later?

A: The more you borrow, the more you have to pay in monthly interest payments to your lender. If you are borrowing $200,000 or $175,000, you need to know that you will pay the bank more on the additional money you borrow.

There are quite a number of issues that we need to address with you on taking out a larger or smaller loan in addition to know whether your interest rate will be higher the more you borrow.

Some people may want to borrow as much as possible today with the low interest rates available. In your situation if your only savings are the additional $30,000 that you could put down on the loan, you might want to think about where you’d invest the cash if it wasn’t placed towards the down payment on the home. You should also consider whether you might need that money for a rainy fund to help you out in the future.

If you have other rainy day cash available, and you are just wondering when is the optimal time to prepay your mortgage, then the question you have to answer is what is that cash doing now. If it is in a savings account earning nothing and you can prepay your loan that is costing you 4 percent (let’s say), then you’ve effectively earned 4 percent on that money. It’s good money sense.

If you take out a fixed rate 30-year loan and you make the additional payment during the first year of your loan, your monthly interest and principal payments will not change after you make the additional $30,000 payment. What will change is that you will shorten the life of the loan so that instead of paying off the loan over thirty years, you might pay off the loan by several months or years sooner depending on the original size of the loan.

But if you’ve obtained an adjustable 30-year loan, the extra payment you make will reduce the amount outstanding on the loan and while your loan term won’t change, your monthly payments will drop to reflect your prepayment.

If you’re are putting down less than 20 percent towards the purchase of the home and the extra $30,000 will allow you to put down at least 20 percent towards the purchase of the home, that’s a move you should make. Not only might you obtain a lower interest rate, you’ll also save yourself thousands of dollars by avoiding private mortgage insurance.

You should talk to a good mortgage lender or mortgage broker to walk through your options and ask him or her to tell you what your rate and costs would be on your new loan if you put down an additional $30,000 or $60,000.


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