Should You Put More Down On Your Home Loan To Get A Better Deal?

The short answer to that question is yes, you will get a better deal on your mortgage if you put more down, but should you?

Let’s talk a little bit more about that. First of all, there are over 30 different parameters that affect what your interest rate is in your home loan. Down payment is just one of them. On a government type loan FHA, VA putting more down on the home loan does not get you a better interest rate. There’s other factors that can get you a better interest rate, but let’s talk about a conventional loan because on a conventional loan, that’s where you can give some benefit on putting more down.

Traditionally, people have thought that you have to put 20% down on a conventional mortgage in order to get one, but that’s actually not true. You can put less than 20% down on the mortgage, but then you’re going to have mortgage insurance. Mortgage insurance is an insurance policy where you pay the premium as part of your monthly mortgage payment, but it doesn’t benefit you at all. It’s a benefit to the lender and it ensures them in case you default on your mortgage and they can’t sell the house for at least how much you owe on the mortgage. It covers that gap. It’s kind of like gap insurance. So as you put more down, if it’s less than 20% that you put down, as you put more down, you’re going to get a lower mortgage insurance rate. So 3% is the highest mortgage insurance rate, 5% down, it gets a little bit better, 10% down, a little bit better yet, 15% down, better yet, 20% down, no mortgage insurance.

However, the interest rate is the same between 3% and 20% down if everything else is the same, as far as credit score and loan program and that type of thing. Now, if you put more than 20% down, you can get a lower interest rate. So 25% down will get you a little bit better interest rate than 20% down. 30% down as the next threshold. And then 40% down is the best possible scenario. That’s going to get you the lowest interest rate. However, if you put more than 40% down, you’re not going to get the benefit of a lower interest rate. Now you’re going to have a lower payment because you’re not borrowing more, but the interest rate’s not going to improve.

Now we get to the question of, should you put more down? That’s a question that only you can ultimately answer, but there’s a lot of things to think about as to whether you want to put more down or not. And the biggest factor in my opinion is where you’re pulling the money from. So if you’re taking the money from the sale of another house and rolling it over into the new house, that’s a viable option. But one big consideration is where you’re pulling the money as far as if it’s coming out of an investment. So if you’re pulling money out of an investment, this is something very important to talk to your investment advisor about as far as your timing on doing that and the repercussions, whether it’s tax implications or in a circumstance like right now, when the market’s down a lot. Right now, we’re in the middle of COVID, the markets are down so you’re pulling money out in a downmarket.

The improvement on the interest rate between 20% and 40% down, for example is not significant. It’s not earth shattering. It’s a little bit lower with 40% down, but it’s not a gigantic difference. So this is something very important to think about strategically when you’re considering how much down payment to put on your house. And if that benefit is really worth pulling that money out from other sources. So that’s my thoughts on more down payment. If you have some questions about your specific situation or anything else loan related, please give me a call. 303-670-0137