Should You Make a Larger Home Down Payment, or Take Out a Larger Mortgage?

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  • A higher down payment could mean smaller mortgage payments, but you're parting with more cash upfront.
  • A lower down payment could mean higher mortgage payments and more money spent on interest throughout your repayment period.

As of early March, the typical monthly mortgage payment on a median-asking-price home was $2,563, according to Redfin. That assumes a mortgage rate of 6.73%.

Now, the monthly mortgage payment you wind with will hinge on factors that include the price of your home and the rate you manage to lock in on your loan. But the amount of money you put down on your home will also have an impact.

If you're taking out a conventional mortgage, as opposed to an FHA loan, you'll often need to put down a minimum of 5% on your home, and some lenders might require 10% down. If you don't make a 20% down payment on a conventional mortgage, you'll be looking at paying private mortgage insurance, or PMI, which is an added cost that will make your loan more expensive.

Now, perhaps a 20% down payment is a stretch for you when signing a mortgage -- or maybe it's not. 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 upside of a larger down payment

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. That means you'll end up spending less money on interest in the course of paying off your home.

The downside of a higher down payment

Parting with a larger sum of cash upfront could have consequences. For one thing, you'll have fewer financial options should you decide you want to renovate your property early on. Also, if you pump more money into your home, you'll have less money to use for other purposes, like investments.

How to land on the right down payment

If you're able to pretty comfortably put down 20% on your home purchase, then it pays to do so simply to avoid having to pay PMI. From there, you'll need to weigh the pros and cons of putting even more money down.

One factor to consider is the shape your home is in when you buy it. If it's pretty updated and you don't think you'll need to make many improvements or repairs, then it could make sense to increase your down payment. Similarly, if you're doing well with regard to your various financial goals, like retirement savings, then you may want to make a larger down payment, since it likely won't be an impediment to meeting your objectives.

Your mortgage rate should also help determine what down payment you make. When mortgage rates are low, it generally pays to put less money down on a home, the logic being that you might easily generate a higher return by investing your cash.

But these days, mortgage rates are higher across the board. So if you're looking at a 6.5% mortgage rate, you may or may not exceed that rate of return in an investment portfolio, depending on how you invest and how well your assets perform.

No matter what down payment you land on, make sure to leave yourself with a solid emergency fund. At a minimum, that means having enough cash on hand to cover three months of essential living costs, including any new expenses you'll be taking on once you move into your home.

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