The Pros and Cons of Making a Larger Down Payment

In most instances, you cannot avoid making a down payment when buying an expensive property. This is part of the operations of lending companies required to build up their revenue. It is also a gauge used by lenders to determine the financial stability of their borrowers. If you are a borrower, you have to consider the pros and cons of making a larger down payment. Aside from having to wait for a longer period to raise the fund, it will also leave a major dent in your finances if your income is only at the average level. Learn its effects before making a decision to put up the cash required.

The Advantages of a Bigger Down Payment

It reduces the principal

The bigger down payment you put up will decrease the amount of the loan you are going to work out. It increases your equity in the property. The bigger your down payment, the bigger your equity in the home you are going to buy. This gives you more confidence and motivation to work harder to repay it in full. You can use the equity for a second mortgage when there is a need for extra money.

Lower payment rate and interest expenses

If you pay a bigger down payment, the loan you will have to sign is smaller. This will result in a smaller monthly payment with a corresponding smaller interest. Normally, if you pay a higher down payment, the lender is willing to lower the interest rate. This will allow you to save more which you can later use to liquidate the loan faster.

Easier approval

If you are willing to make a bigger down payment, your lender is more inclined to process your mortgage faster. A down payment signifies your financial stability and this is given weight by the lender.

No mortgage insurance fees

If you make a bigger down payment, it is not necessary to buy a mortgage insurance since your loan is not very significant. You can therefore save money on insurance premiums which range from 0.5% to 1% of your home value.

Disadvantages of a Larger Down Payment

A big drain to your finances

A bigger down payment than what is normally required will cause you to source it longer. If you use your regular source of income to put some of it aside, your other financial needs will have to give way. It will stop you from doing or buying things which you have to do or buy as before. If you borrow the money, you will pay extra for the interest just to raise it.

Other investments

If you have some extra money, you can invest in high paying stocks that can bring you a substantial profit. The money you paid for a higher down payment is tied down with a fixed asset for a long period of years without a realizable profit.

Higher risk in case of default

If you fail to pay your regular installments and the property is foreclosed, you will lose not only the monthly amortization you have already paid but the bigger down payment.

Higher risk when selling the property

If the market is depressed and you need to dispose your property under mortgage, your risk to incur losses is higher because of the bigger down payment that you have made.

It is quite difficult to make up your mind when considering a down payment. You must really sit down and evaluate one by one the pros and cons about making a larger down payment.

Categories: Finance