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Here’s What Happens When You Make a Higher Down Payment on a Home

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When you sign a mortgage, you’re generally required to bring some amount of money to the table in the form of a down payment. Putting down 20% on a conventional mortgage will allow you to avoid private mortgage insurance, a costly premium that gets tacked onto your mortgage costs. But some mortgage lenders will accept less money down.

Rocket Mortgage says a 20% down payment is widely considered ideal for most loan types and lenders. But if you have the ability to make an even larger down payment than that, it could work to your benefit. Here are some of the perks you might enjoy when you make a higher down payment on a home.

1. You’ll have lower monthly mortgage payments

The more money you put down on a home, the less money you have to spend each month in mortgage payment form. It’s that simple.

So, let’s say you’re signing a 30-year fixed mortgage at 6.81%. That’s the average interest rate for that loan type as of this writing, according to Freddie Mac.

If you’re buying a $250,000 house and you make a 20% down payment, you’ll be looking at spending $1,306 a month on principal and interest on your home loan. But if you make a 40% down payment, you’ll only have to spend $979 a month. That’s a much easier payment to work into your budget.

2. You’ll build equity in your home sooner

Equity refers to the portion of your home that you own outright, and it’s something you can borrow against as needed. As an example, if you own a $500,000 home with an outstanding $300,000 mortgage, you have $200,000 worth of equity.

The higher your down payment, the more home equity you get from the start. That can be a really good thing should you need to tap your equity, or should you decide to sell your home shortly after buying it.

3. You’ll save money on interest

The less money you have to borrow to buy a home, the less you’ll end up spending on interest. Going back to our example above, if you make a 20% down payment, you would spend $270,156 on interest alone in the course of paying off your home. A 40% down payment, on the other hand, would have you spending $202,613. That’s a total savings of $67,543.

But there’s a downside, too

Clearly, there’s plenty to be gained by making a larger down payment on a home. But remember, the more money you put down when you buy a home, the less you have left for other purposes. That could create a problem should you wind up with home repairs, for example, or other expenses you need to tap your savings account for.

Also, while making a larger down payment can save you money on interest in the course of paying off a home, you tie up that money so you can’t invest it. Over the past 50 years, the stock market’s average annual return has been 10% (before inflation), as measured by the S&P 500. Investing an extra $50,000 rather than putting it into a home down payment could mean growing that sum into around $872,000 over 30 years if your portfolio generates a 10% average yearly return during that time.

That represents a gain of $822,000. Compare that to $67,543 on interest, and, well, there is no comparison.

Of course, this assumes that you’ll actually invest the money you don’t put into your home’s down payment, and that you generate a strong return. The point, however, is that while making a larger down payment could benefit you in many ways, it’s also important to consider the other things you might be able to do with that money.

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