The Pros and Cons of Putting a Large Down Payment on a House

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Today, American home buyers take an average of 6 and a half years to save enough money for a 20% mortgage down payment. And, as house prices continue to rise, this timeline is bound to stretch even further. However, with the right mortgage products (such as VA, FDA, and USDA loans) you can buy your dream home with as little as 0-5% down payment.

So, should you wait to put together a large enough down payment? Or should you reap the benefits of taking a step up the property ladder without delays?

Here are a few pros and cons of putting a large down payment on a house to help you decide.

Pro: Better Mortgage Rates and Terms

If you are a first-time homebuyer, your chosen mortgage lender will determine your risk and creditworthiness by looking at several indicators. These include your credit score, your debt-to-income ratio, and, more importantly, the loan-to-value (LTV) ratio.

This ratio refers to what percentage of the property’s market value you’ll need to borrow to afford it.

Generally, lenders will consider any LTV ratios of 80% or below acceptable, which means that you’ll need at least a 20% down payment. If you are requesting a loan of more than 80% of your chosen property’s market price, your lender will compensate for the heightened risk by increasing interest rates or shortening the lifecycle of your loan.

If you are unsure about the right LTV ratio you need to achieve to maintain your finances balanced, consider finding a reputable home buying guide or the help of a specialized financial advisor.

Con: It Can Impact Your Savings or Investment Strategy

Naturally, there are many pros and cons of buying a house and, one of the main disadvantages of this move is that you will need to redirect a significant part of your income towards saving for a downpayment. What’s more, the larger your down payment is, the smaller your investment or savings capital will be.

Make sure to compare the benefits of investing in a home and the advantages of staying invested in the stock market or boosting your emergency fund before committing to a certain financial move.

Pro: It Offers You More Equity in Your Home

According to recent estimations, half of the mortgaged properties in the US are equity rich, meaning that their owners own at least 50% of their home’s equity. This upward trend has been fuelled by rising home prices but, for new homebuyers, gaining enough equity in their property remains a challenge.

Putting down at least a 20% downpayment can help you build equity in your investment from the start, thus boosting the value of your real estate assets over time.

Cons: It Can Significantly Affect Your Household Budget

Redirecting most of your savings of invested capital to a mortgage down payment can temporarily throw your family finances off balance, especially if you have been experiencing cash flow issues or you have had to face unexpected expenses.

To prevent this common pitfall, make sure to use a mortgage calculator before taking out a mortgage and consider keeping enough money in your emergency fund.

Pro: It Can Reduce Monthly Mortgage Repayments

One of the things to remember as a first-time homebuyer is that a larger down payment can reduce your mortgage amount. In turn, this can decrease your monthly downpayment and encourage your lender to offer lower interest rates, which can reduce the overall amount you’ll need to repay over the lifetime of your loan.

Cons: You Might Need To Spend More Time Saving

When investing in a real estate property, time is of the essence. Although interest rates are now increasing, homebuyers still have the opportunity to take out a mortgage at convenient terms.

So, depending on your finance and mortgage eligibility, taking the first step up the property ladder - even if with a smaller down payment - can yield significant benefits in the long run.

Pro: It Can Help You Avoid Additional Costs (i.e.: Private Mortgage Insurance)

Buying a house can be a costly endeavor, especially if you have to afford steep closing costs and real estate agent fees. However, there are ways to reduce your mortgage costs in the long run - and, one of the best ways to do so is to gain at least 20% equity in your home.

If you can put down at least 20% on a property, you will be able to benefit from lower interest rates and save on the cost of Private Mortgage Insurance.

Con: It Reduces Your Assets’ Liquidity

A large down payment can cause you to tie your savings, stocks, crypto, or any other liquid asset into an illiquid asset. This means that, when experiencing a financial fallback, you might not be able to access cash quickly enough to avert an emergency.

While, ultimately, the choice of how much down payment to put towards a house is all yours, make sure to consult a specialized advisor before making a consequential financial move.