Four Benefits of a Larger Down Payment

Hey y’all, Zach McDonald, your real estate agent with Real Property Associates, and today I’m going to share with you four benefits of a larger down payment. When mortgage interest rates are high.

There are a lot of videos you can find about whether it makes sense to make a smaller down payment or a larger down payment. how much you need to put down in, heck, I’ve even made some of those videos, but as I’m reflecting on a home purchase myself, a larger home, a bigger home, I’m starting to look at, man, that’s a big mortgage. Wow, that’s a big interest rate. And I put a little bit more thought into whether it makes sense to have a smaller down payment with a massive mortgage, or if it makes sense to have a bigger down payment to limit the size of the mortgage. So I wanna share with you a few of the things that I’m thinking about right now as I consider making a larger home purchase and taking on a bigger mortgage and some of those things that I’m considering.

So the first thing is the monthly payment. The historic argument for putting a smaller down payment is that you’re able to maximize the return on your investment. Essentially, you have a smaller down payment, you’re capturing the full amount of appreciation and you’re putting your money to work in other places. Now, that’s a great reason to make a smaller down payment when interest rates are really low because you’re buying with cheap money now and as inflation happens and it’s really happening right now, your money in the future is worth less anyway. So you’re paying with tomorrow’s money and you have a really low interest rate and you can put that money to work and potentially make you a greater return on your investment than the three and a quarter. That’s my current interest rate is currently costing you. But if you’re thinking about a purchase right now, you’re probably looking at a six to 7% interest rate depending on the different factors at play.

So that’s a huge difference. And right now I’m thinking about a purchase that’s more expensive than my current house. So I’m going to have a larger mortgage and I’m also going to have a higher interest rate. So I’ve got both of those factors at play, and the question I’m asking myself is, does it make sense to put a minimum down payment and have a really large mortgage with a 7% interest rate, or is it better for me to take that money and put a larger down payment down because I can and reduce the amount of the mortgage? As I’m thinking about this, yes, I want to make sure that I’m putting my money to good use, but at the same time, how confident am I in the stock market right now and how confident am I in the housing market? And if I’m really honest with myself, I have more confidence in the housing market right now than I do in the stock market, at least for the short term.

And while interest rates are high, if I can save 7% on a significant chunk of money, that’s going to save me a lot of money. Whereas if I was to put that same money in the stock market, I’m not sure I’m actually gonna be making 7% on that money right now. So the not losing 7% on a certain chunk of money to me, seems like a good reason to maybe take that money out of the stock market, put it in to the house, and then consider some options in the future. So the big idea would be that maybe I put a larger amount of money into the house now with higher interest rates, so I have a smaller mortgage, and then when it rates come back down, I can, if I want, refinance the house, take some of that cash back out and reinvest it elsewhere.

With that being said, I think there are some legitimately good reasons or benefits of having a smaller mortgage or putting a larger amount of money down. So the first one is the lower monthly payments. You have less of an obligation every month towards the house and when the market is uncertain, and maybe if you’re in a situation where you’re not sure that your jobs is secure, there’s less risk to having to make this larger payment when well, you have a smaller payment. So I think the smaller payment is a huge part of it. The lower interest costs, that’s a big reason why the payment is smaller. You have a huge chunk of your payments at the beginning of your 30 year loan or even your 15 year loan that are going towards interest. And with a larger interest rate, well that payment’s even bigger and you don’t get that money back.

I mean, yes, you can write some of it off if it’s your primary residence, but at the same time, with the lower interest costs, you also have a lower payment, which is number one, and you’re able to take that excess money or the money that you are saving that you wouldn’t be spending on your larger mortgage, and you’re able to reinvest it and put it to work elsewhere, so you’re still able to accomplish that goal. The third benefit of the larger down payment is that you have more equity in the house. You have a greater ability to borrow against it. In the future, you might be able to get a really strong cash out refinance with a lower rate in the future. It’s also easier to refinance in the future when you have a larger amount, especially if maybe the housing market does correct even a little bit more.

Maybe prices come down a little bit in the short term, but you’re able to capture a lower rate. The Mark Cash you have in the house, the easier it is to accomplish that cash out refinance and have a better rate when rates are better. But it’s also safer to have more equity in your house. Again, mentioning if the market does adjust a little bit, you are in a position where you’re not gonna be short selling or having to walk away from the house necessarily. Yeah, it’s not gonna feel great to see the numbers go down in the short term, but if you’re in a situation where you need to move on, you’re going to have more equity in the house and not be in a tough situation in the short term. A fourth benefit to a larger down payment is you have less risk, right? If you take all these things into consideration, a lower payment, more equity, you’re just reducing your risk.

You are not overextended, you have less debt, and therefore you have less risk. I think higher debt means more risk, you’re more spread out, and it’s a lot larger obligation to fulfill in the future. And again, you can always increase that risk or take money out in the future, but in the meantime, while interest rates are higher and the economy’s a little bit more volatile, it does reduce that level of risk that you have in that bigger home purchase. So let’s sum it up. When you’re thinking about purchasing a house, a big part of that is the financing. If you’re paying cash, good for you. I think this might be of all the times, one of the better times to pay cash because you’re saving all of those interest payments on a monthly basis. But if you are financing it, I think it makes sense to consider putting a larger down payment if you can.

Now, not everybody’s in a position where they can bring additional funds to the purchase. Maybe you have a cap or a limit to how much money you’re able to contribute towards your purchase. And in that case, I guess this video maybe doesn’t apply as well to your situation. But if you are in a position where you’re debating between a 20% down payment or a 10 and a 10% down payment, or maybe a 30 or 40% versus 20% down payment, maybe consider having a larger down payment and having a smaller loan in the short term. And when mortgage rates do come down in the future, and they will, you’ll have a lot of flexibility in your decision making, whether you want to keep the low mortgage and just have a smaller payment on a monthly basis, or whether you want to take some cash out and repurpose it into other investments. Thanks so much for watching this video as we consider four benefits to making a larger down payment on your home in a higher interest rate environment. If you’ve been thinking about making a home purchase here, maybe upgrading your house or buying a bigger house, please don’t hesitate to reach out.