Saving up so you can afford a down payment on a house can take years. When you’re so close to obtaining the dream of homeownership, every second feels like a lifetime. As a result, a lot of first-time buyers are tempted into making the smallest down payment possible. That might seem like a good idea on the surface, but the truth is that smaller down payments have several drawbacks.
Here are three reasons you should consider saving up to make a larger down payment instead.
It Will Lower Your Monthly Mortgage Payments
The most obvious reason to make a big down payment on a house instead of a small one is because it means you own more of your house. This in turn means that the amount you have to owe your mortgage lender is lower, which means you can pay it off a lot easier. Best of all, it means your required monthly payments will be more affordable.
Don’t believe me? See for yourself; you can use an online house payment calculator to determine roughly what you can expect to owe the bank based on the cost of the property and the size of your down payment. Paying more now might seem expensive and difficult, but it can save you a lot of money, time, and stress in the long run.
You Won’t Have to Pay for Mortgage Insurance
One mistake that too many first-time homeowners make when they start saving for a house is assuming that the down payment and mortgage are all they have to worry about. The truth is that there are all kinds of hidden and not-so-hidden costs waiting to trip buyers up.
For example, if you make a down payment that is lower than 20% of the full purchase price of your home, most lenders will require you to pay for private mortgage insurance, or PMI, in addition to your mortgage payments. This can cost a homeowner hundreds of thousands of dollars in the years it takes to acquire the minimum 20% equity. And that’s money you’ll never see any benefit from. It exists solely to protect lenders in case you default on your loan.
Lenders Will Be More Willing to Work with You
It’s not pretty, but it’s the truth: mortgage lenders don’t provide loans to first-time homeowners out of the goodness of their heart. They do because that’s their business. When you enter a mortgage agreement with a lender, they’re getting something out of it. What they get out of it is interest, a promise that you will pay them back every dollar you borrowed, and then some.
Unfortunately that doesn’t always work out. When a homeowner defaults on their mortgage, the lender is left trying to recoup their funds by foreclosing and reselling the house, and that doesn’t always work out. That’s why lenders tend to prefer buyers with good credit scores. It’s also why they’re more willing to work with lenders who can afford a larger down payment. A larger down payment means less risk for thSaving up so you can afford a down payment on a house can take years. When you’re so close to obtaining the dream of homeownership, every second feels like a lifetime. As a result, a lot of first-time buyers are tempted into making the smallest down payment possible. That might seem like a good idea on the surface, but the truth is that smaller down payments have several drawbacks.