I Made a Big Down Payment on My Recent Home Purchase. Should You Do the Same?

Since 2018, the average down payment first-time home buyers make has been around 6% to 7%. Those who have bought a home before typically put down a higher amount, with the average down payment coming in at 17% in 2021.

When I made an offer on the home I'm buying, I opted to make a much larger down payment -- 31%. This is larger than the amount I've put down on any prior home purchase, and there were a few key reasons why I put so much down.

Since the house is a fixer-upper, I was worried about whether it would appraise for enough for a mortgage lender to give me an affordable loan. I also wanted to make my offer as strong as it could be to maximize the chances of it being accepted, and a larger down payment did that.

If you're buying a home of your own, you may also wonder whether you should make a large down payment as well. Here's how to decide.

These are the benefits of a big down payment

In my situation, making a big down payment made sense because I didn't want to have a problem with the home not appraising for as much as I needed.

Lenders will typically limit how much you can borrow relative to what the home is worth. In some cases, you can borrow up to 97% of what a home is worth, but many lenders limit you to borrowing 80% or 90% of its market value. If your home doesn't appraise for as much as you're paying for it, this could create problems with your loan-to-value ratio. If you suspect this might be an issue, a larger down payment makes sense.

A larger down payment can also make sense if you are trying to compete with other buyers, like I was, since sellers will feel more confident in your ability to get financing if you are putting more down.

Other benefits of a larger down payment include:

• A lower mortgage payment since you aren't borrowing as much
• A lower interest rate in many cases, since a lender isn't taking on as much risk
• A wider choice of lenders, since you won't be limited to those that allow low down payments
• Avoiding private mortgage insurance (PMI), which you'd have to pay if you put down less than 20%

If you want to make your home more affordable or your offer more attractive, putting more down just makes good sense.

These are the downsides

There are some downsides to a larger down payment as well.

One big issue is you might have to put off homeownership longer in order to save up enough money. You could also have less cash to cover emergencies or other expenses.

You're also tying up money when you put more down on your home. The average mortgage rate has recently been hovering at between 7.00% and 8.00% for a 30-year fixed rate loan, but in the recent past, it's been as low as 3.00% or 4.00%. It often makes little sense to put extra money down when you could invest it and get a higher rate of return than the return on investment (ROI) from reduced mortgage interest.

Ultimately, you need to consider whether putting more money into your home is worth the potential benefits that could result from a larger down payment. Generally, you should aim for around a 20% down payment on a mortgage loan to avoid PMI, but probably don't want to go above that amount unless there's a very good reason to, like the reasons that apply in my situation.