Top Reasons a Larger Down Payment Will Save You Money on a Home Loan

Homeownership is a liberating experience, particularly if you have been a longtime renter.  Owning your own home is one of the best investments you will ever make, regardless of what the real estate industry might do – you simply hold onto your property until the market rectifies itself and you’re back in the black.  However, before you jump headlong into homeownership, you should know some of the best ways to save money over the life of the loan.  As it stands, a larger down payment is the best way to do that.  Why is this?

Why will a larger down payment help you save money over the life of a home loan?  Actually, there are several reasons.  First, the more money you put down on the home, the lower the amount will be that you have to finance.  Lenders like to finance smaller amounts, because it means that their risk is reduced – it’s more likely that you will be able to pay off a smaller amount than a larger one.  Therefore, they will reduce the interest rate on your home loan.  This can save you thousands of dollars over the course of a loan.

You will also find that the larger the down payment of your home, the less likely you are to have to carry PMI or private mortgage insurance.  This type of insurance is designed to protect the lender in case of default and is required if you are paying less than a certain percent of the home’s value.  Therefore, if you put down more money up front, beyond that 20% minimum, you will save a ton of money by not having to pay for private mortgage insurance.  You can then put that extra money to work for you by making extra mortgage payments and paying off the loan early.

However, there are a few caveats to putting down a larger payment upfront.  You should only pay as much as you feasibly can, without incurring additional financing.  For instance, some homebuyers will borrow on their credit cards or take out a line of credit to afford a larger down payment.  This is never a good idea, because it simply increases your debt load, without actually providing you with any benefits.  The interest on these loans is often more than what you would spend on PMI, so your savings are negated.

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