Making a Large Down Payment - Is it Right For You?

Getting ready to buy a home?  Applying for a mortgage? Trying to figure out how you will fund your down payment? You could use the money you so diligently saved with your Savings or Money Market Account to make a higher down payment.  But do you want to make a higher payment, or is it better to spend less money upfront?  Here we show you both sides of the question, whether a larger or smaller down payment is better.

Not all mortgage loans require customers to make a 20% down payment.  Some loans require only 5%, while others require no down payment.  As appealing as these two options sound, you must keep in mind that if the lender saves you money in one place, you will most likely have to pay it somewhere else. In this case, in the form of higher interest rates and Private Mortgage Insurance (PMI).  Here are three advantages of making a large down payment:

• Better rates. Generally, the larger the down payment, the better the rates and terms you will receive from the lender.
• Less interest. Making a larger down payment reduces the amount you will have to borrow, so you will pay less interest over the total life of your mortgage loan.
• No extra cost for insurance. By making a down payment of at least 20%, you will not be required to have Private Mortgage Insurance (PMI), the cost of which would be included in your monthly mortgage payment.

1. One disadvantage of taking money out of your Savings Account to make a higher down payment is that you will no longer receive the interest that your money was earning in the account.  This is only a problem, though, if the average rate of return on your savings is more than the interest rate on your mortgage. 
2. Another disadvantage is that you will have less interest to pay on your mortgage, which translates into less tax-deductible payments.
3. One more disadvantage is the immediate cash access that you lose when you deplete your savings account.  It is important to have an emergency fund, and if you use your savings to make a down payment, you might sacrifice your emergency fund as well.

Consider Your Situation
Now that we have presented the advantages and disadvantages of making a large down payment on your mortgage loan, you need to consider your situation and figure out which is the best option for you.  Can you afford a 20% down payment?  If not, then maybe you need to go with the smaller down payment and higher monthly payments.  What kind of payment schedule would work best for you?  These questions must be answered before you apply for a mortgage loan.  Make sure to compare different loan products and rates online, as well as to consult your financial advisor or tax accountant before making your final decision.

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