5 Reasons to save for a bigger down payment

If you are reading this article you could be excited about purchasing a home especially if you are a first time home buyer. You also probably already know its take time and hard work to save up for a large down payment. Working hard and saving up for a larger down payment has several positive advantages which we are going to discuss right now.

 

Most individuals and families have to finance most of the homes purchase price with a mortgage. The dollar amount you put down on the home determines the size of the mortgage. A conventional mortgage loan typically requires a down payment of 20% of the purchase price of the home.

There are several good financial benefits for saving for more than just a basic 20% down payment.
We came up with 5 good reasons.

 

#1 Reduced monthly payments.

The more money you put down on the down payment of your home, the smaller your mortgage payments will be every month. This can definitely have a positive effect on your monthly budget. More importantly, you will save thousands of dollars in money over the long run. For example, let’s say on a 30 year fixed mortgage at a 5% interest rate, you put an additional $15,000 into the down payment you will wind up saving $13,987.50 in interest payments over the life cycle of your home loan.

 #2 Lower interest rates

Financial lenders often offer better interest rates to borrowers with a lower loan to value ratio, or the percentage of the home purchase price that you are going to be financing. An increase in the down payment will lower the ratio and reduces the risk to the lender that you will be unable to pay your full mortgage balance. Lower interest rates will also save you money over the life of your home mortgage.

 

#3 No mortgage insurance fees

If you can’t afford the typical 20% down payment required by most lenders you will likely be required to take out mortgage insurance. This special insurance protects the lender in case you fall behind and cannot afford to pay your mortgage. There are federal insurance programs that are available to qualified purchasers, in addition to the private insurance options that are out there. Mortgage insurance isn’t cheap and can be quite expensive. The cost of mortgage insurance usually ranged anywhere from 0.5% to 1% of the home’s value to several thousand dollars per year. The insurance premiums are an extra bill you will have to pay and they are not applied to the balance of your mortgage.

 

#4 Less risk when selling your home

Real estate values move up and down every day with the economy. This means the value of your home will go up and will go down after you purchase a home. If the economy and market are in a down swing and you have to sell your home, you will find that your mortgage balance is higher than the value of your home. This is also known as being “underwater” or “upside down” on your mortgage or loan. This very situation gives you much less flexibility in accepting offers and may make it difficult to sell your home and pay your mortgage. If you made a 20% or larger down payment on your home when you purchased your home then you are much less likely to wind up “upside down” on your mortgage – loan.


#5 Ability to ride out financial crises
We all know the future is unpredictable. You may someday encounter a financial crisis or emergency such as loss of your job, serious illness or disability which can impair your ability to pay your mortgage – loan. If you have financial equity in your home because you were smart and made a larger then required down payment, then you can better survive a financial storm should one arise.  Your mortgage – loan payment will be smaller, and should you need you can borrow against the equity in your home.

 

The conclusion here is pre planning and taking the time to save up for a more then basic 20% down payment on your mortgage is not only a smart decision but it is a rock solid investment in yourself and your livelihood. It can and will save you thousands of dollars over the course of your mortgage and that means more money for you.

 

 

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