Considering a large down payment?

The Math:

At today's interest rates (mid 4%'s), every $10,000 borrowed on a 30-year fixed rate translates into a monthly payment of roughly $50. Of that, about $37 is interest.

Here are a couple of questions to ask yourself:

  • "Can I make more than $37(x)/mo by keeping my $10,000(x) in my investment portfolio?"
  • "Will the $50(x)/mo be reflected in my monthly budget? Or am I going to spend it?"

And some common arguments:

  • This is a relatively low cost of borrowing. Borrowing more keeps my money liquid for higher-earning investment opportunities in the future, and my higher mortgage payment helps me keep my spending in check.
  • Borrowing rates on the mortgage are lower than other rates I am paying. It makes sense to pay off all other debt first, then set my mortgage amount. If I'm worried about paying more interest as a result of the longer term on the mortgage, I can prepay the loan aggressively, and maintain lower minimum monthly payments and interest savings.
  • Most mortgages do not charge a prepayment penalty and lenders will usually "recast" the payment when large principal contributions are made. Therefore I can borrow more than I need at closing and pay down the loan later once the dust settles and have the payment lowered to reflect the reduced loan balance.

Summary

The benchmark down payment is 20% because that allows you to avoid paying mortgage insurance. Whether to put more down is a matter of personal preference, and the best decision is the one you feel best about after considering the alternatives available to you now or in the future.

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