Buying a home is exciting! You found your new home and now it’s time to make an offer. How much down payment is appropriate? In a competitive market, it’s critical to present a compelling offer and emerge victorious in a bidding war.
There are several tactics, and it’s important to understand how your down payment affects your offer. Let’s examine the various choices and how your offer may be affected by them. Does a larger down payment make your offer stronger?
Buying a house is a major life decision, and one of the first questions you’ll face is how much to put down. While the traditional advice is to aim for 20%, the truth is, there’s no one-size-fits-all answer. In this article, we’ll dive deep into the pros and cons of making a large down payment, helping you decide what’s best for your unique situation.
The 20% Myth: Is It Really Necessary?
For decades, the 20% down payment has been touted as the golden rule of homeownership But in today’s market, with rising home prices and diverse loan options, this advice might not always be the best fit.
The Benefits of a Bigger Down Payment:
- Lower Loan Amount: A larger down payment translates to a smaller loan, which means less interest paid over time. This can save you thousands, even tens of thousands, of dollars in the long run.
- Reduced Mortgage Insurance: Many loans require private mortgage insurance (PMI) if your down payment is less than 20%. This monthly expense can add hundreds of dollars to your mortgage payment. A larger down payment can help you avoid PMI altogether.
- Better Interest Rates: Lenders consider borrowers with larger down payments less risky, often rewarding them with lower interest rates. This can further reduce your monthly payments and save you money over the life of the loan.
- More Equity: With a larger down payment, you’ll own a bigger chunk of your home from the start. This gives you more financial flexibility and security, and can be advantageous if you need to sell or refinance in the future.
The Drawbacks of a Big Down Payment:
- Delayed Homeownership: Saving up a large down payment can take years, potentially delaying your entry into the housing market. During this time, you’ll likely be paying rent, which could eat into your savings and make it even harder to reach your goal.
- Limited Investment Opportunities: Putting all your money into a down payment can mean missing out on other investment opportunities that could potentially offer higher returns.
- Reduced Financial Flexibility: Having a large chunk of your savings tied up in a down payment can limit your financial flexibility. Unexpected expenses or emergencies could become more challenging to manage.
- Opportunity Cost: The money you use for a larger down payment could be used for other purposes, such as paying off high-interest debt or contributing to your retirement savings.
Finding the Right Balance:
Ultimately, the decision of how much to put down on a house depends on your individual circumstances. Consider factors like your financial situation, your long-term goals, and the current housing market conditions.
Here are some questions to ask yourself:
- How long do I plan to stay in this house?
- Can I afford a higher monthly payment with a smaller down payment?
- Are there other financial goals I need to prioritize?
- How comfortable am I with taking on more debt?
Additional Resources:
- HSH.com: Pros and Cons of a Large Down Payment on a House
- Reddit: House deposit percentages – is there much point in putting down more than 10%?
- NerdWallet: How Much Down Payment Do You Need to Buy a House?
Remember, there’s no right or wrong answer when it comes to down payments. The key is to carefully consider your options and choose the path that best fits your needs and financial goals.
Benefits of a larger down payment
Is your offer stronger if you make a larger down payment? In short, a larger down payment can draw the seller’s attention. There are many buyers making offers in a competitive market, so raising your offer doesn’t ensure you’ll win over the other bidders. However, demonstrating your ability to obtain a mortgage can be more attractive. By obtaining a mortgage lender’s pre-qualification and making a larger down payment, you can demonstrate to the seller your financial commitment.
If your offer is lower, your down payment can still make you a better candidate. A larger down payment demonstrates to the seller your motivation because it indicates that you are not going to haggle and that you will pay the closing costs on your own.
You are a more competitive buyer because it shows the seller you are more reliable. Because you pose less risk to a lender, a larger down payment increases your chances of being approved for a mortgage. Additionally, a lower loan-to-value ratio (LTV) might make you eligible for cheaper interest rates and fewer fees. It also means that you will own a larger portion of the value of your house. If you have at least 20% down, you’ll also avoid private mortgage insurance (PMI).
Your higher down payment can reward you with additional benefits as well:
- Lower monthly payments
- Less interest paid over the life of the home loan
- More equity in your house, which helps protect your investment
- Pay off your mortgage faster—be debt-free sooner!
- Secure a mortgage even if you have less-than-perfect credit
- Reduced closing costs: You are at less risk the lower your LTV
Should I make a contingent offer?
Some buyers may choose to make a contingent offer. With a contingent offer, you agree to buy a home only if your current home sells. If a buyer can’t hold two mortgages at once or make a larger down payment, they go this route. These offers, however, are less alluring to the seller, who might decide to accept a non-contingent offer instead of starting a bidding war.
In a hot market, a seller tends to prefer offers that aren’t contingent. They avoid the constraints of deadlines and don’t have to wait for you to sell your current home. Furthermore, even if the seller accepts your contingent offer, they may still consider better offers, so you might lose out.
A mortgage with little or no down payment is a fantastic substitute for a contingency because it will be a more alluring offer and put you in a better position to buy the house of your dreams. Additionally, some lenders provide bridge loans, which enable you to use the equity in your present residence as a down payment for a new property. This is an additional tactic that can help you steer clear of a contingent offer and put you in a better negotiating position.
Is It Better to Put a Large or Small Down Payment on a House?
FAQ
Is it worth saving for a bigger deposit?
Is it better to put down a large down payment on a house?
Does it make sense to put more than 20 down?
What is the benefit of a higher deposit?
Should you put more money down on a home?
In fact, you might have even more money than that to put down on a home. But should you make a larger down payment, or conserve more of your cash? The higher your home down payment, the lower your monthly mortgage payments will be. Plus, if you put more money down, you’ll be borrowing less from the mortgage lender.
Can a large down payment prevent you from buying a home?
You have a good household income but haven’t had time to save up for a down payment. A large down payment will almost completely deplete your savings. A large down payment is the only thing preventing you from buying a home. If you don’t have to put 20% down, you may automatically decide that you won’t.
How much should you put down on a home?
The average down payment on a home is 12%, according to the National Association of Realtors. For first-time homebuyers, the average down payment is just 7%. Repeat buyers put down an average of 16%. If you can’t put down 20%, you’re in good company. How Much Should You Put Down? How much to put down is a personal decision.
Should you make a larger down payment?
There are, in fact, many benefits to making a larger-than usual down payment, as we’ll discuss below, including: boosting the attractiveness of your offer in home sellers’ eyes. If you at least pay 20% of your purchase price, you won’t have to pay private mortgage insurance, or PMI.