If youre signing a conventional mortgage, its a great thing to be able to make a 20% down payment on your home, even though many lenders will accept less. Doing so allows you to avoid private mortgage insurance, a costly expense thats typically tacked onto your monthly mortgage payments and makes your home more expensive to own.
For many people, coming up with 20% down is a challenge these days due to the state of the market. But what if you have a pile of cash to put into your home down payment, so much so that youre able to pay for 50% of your home upfront?
At first, making a 50% down payment might seem like a good idea. But you should be aware of the drawbacks involved.
Putting down 20% on a home is often considered the gold standard for mortgage down payments. But what if you have the funds to put down 50% or more on a house? Is making a large down payment smart, or could it backfire? Here’s what to think about when deciding how much to put down.
The Potential Benefits of a 50% Down Payment
A 50% down payment could offer a few advantages
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Lower monthly payments: With less borrowed, your monthly mortgage costs go down. On a $300,000 home at 6.82% interest, the monthly payment drops from $1,567 with 20% down to $979 with 50% down – saving you $588 per month.
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Less interest paid: That extra $90,000 down on a $300,000 home saves $121,570 in interest over the loan term versus 20% down.
So in theory, a larger down payment can make owning a home more affordable on a monthly basis while saving substantially on interest.
The Potential Downsides of 50% Down
However, there are some potential drawbacks to be aware of with a down payment over 20%:
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Less liquidity: Tying up an extra $90,000 in your home leaves you with less cash on hand for emergencies or other needs. If you suddenly need that money, you’d have to tap home equity or other financing.
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Opportunity cost: Investing that extra $90,000 over 30 years could yield far more than the $121,570 in mortgage interest savings. At a 10% stock market return, it could grow to $1.57 million.
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No extra benefit: Beyond 20% down, you gain no added advantage in terms of mortgage rates or loan eligibility.
Key Factors to Consider
When deciding whether to put 50% or more down. here are some important things to think about
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Your emergency fund: Don’t sink every last dollar into your home. Maintain a healthy emergency savings account as a buffer.
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Your timeline: If this home is for the long haul, the down payment matters less than if you may sell in 5-7 years.
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Mortgage rates: Weigh savings from a larger down payment against interest rates. The higher the rate, the more impact extra down payment has.
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Investment goals: Will tying up more in your home crowd out other important financial goals like retirement or college savings?
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Your comfort level: Some simply like the security of owing less on their home. Just be sure you’re still diversified.
The Verdict: It Depends
There’s no one-size-fits-all answer on down payment size. The smartest move depends entirely on your unique financial situation and priorities. A 50% down payment can be smart for some buyers, while 20% makes more sense for others. Carefully weigh the pros and cons for your specific circumstances. The key is making an informed decision that sets you up for long-term financial success.
The downside of making a 50% down payment
Its easy to see why making a larger home down payment might appeal to you if you can swing it. But the problem with putting 50% down on a home is that youre tying up a lot of money in an asset that isnt very liquid. And that could cause problems if you end up needing cash down the line.
Lets say you make a 50% down payment on a $300,000 home instead of 20%, thereby spending an extra $90,000 upfront. What if you wind up needing to take a full year off of work to recover from an injury or illness and need $90,000 to cover your familys expenses during that time? What if your home ends up needing a series of very expensive repairs that amount to $90,000?
Suddenly, youre looking at having to borrow to access the funds you need. And while a home equity loan may be an option, you might pay more interest on that than a mortgage.
Also, the idea of saving $121,570 in mortgage interest over 30 years might appeal to you. But you should know that the stock markets average annual return over the past 50 years has been 10%. If you put $90,000 into a stock portfolio with that same return, in 30 years, it could be worth $1.57 million. So which would you rather do — save $121,570 in mortgage interest, or walk away with $1.57 million?
Its definitely worth trying to make a 20% down payment on a home. Doing so could help you avoid the added expense of private mortgage insurance and help you keep your monthly payments to a reasonable level.
But proceed with caution if youre considering putting 50% down on a home. Though theres an upside to going this route, you might lose out financially after alls said and done.
The upside of making a 50% down payment
There are two primary benefits to making a 50% down payment on a home. First, the more money you put down, the less youll pay each month, thereby making those payments fit more easily into your budget.
As of this writing, the average rate on a 30-year mortgage is 6.82%, says Freddie Mac. So lets say youre buying a $300,000 home. If you put down 20%, your monthly principal and interest payments will be $1,567. If you put down 50%, your monthly principal and interest payments will be $979. That frees up $588 a month for you to spend on other things, or just over $7,000 a year.
Furthermore, if you make a 50% down payment on your home, youll minimize the amount of mortgage interest you have to pay. In this example, putting down 50% leaves you paying a total of $202,613 in interest on your home loan, as opposed to $324,183 with 20% down. Thats a savings of $121,570.
Is a Large Home Down Payment More Important Than Ever?
FAQ
Should I put 50% down payment on a house?
Yes, putting 50 percent down on a home can significantly improve your qualifications for a home loan. Here are some key benefits: Lower Loan Amount: A larger down payment reduces the total amount you need to borrow, which can make your loan more manageable and lower your monthly payments.
Do you get a lower interest rate if you put 50% down?
Some lenders may even be willing to give you a lower rate if you have a significant down payment. A down payment tells your lender that you have a better grasp on your finances and thus are less of a risk for default. However, other factors have a bigger influence on your interest rate, like credit score and income.
What are the disadvantages of a large down payment?
Can I afford a $300 k house on a $70 k salary?
Can I afford a $300K house on a $70K salary? If you have minimal debts then a $70,000 salary might be enough to afford a $300,000 house. The size of your down payment and your mortgage interest rate will be important variables. Try to keep your monthly house payments below a third of your monthly gross income.