Considering a large down payment?
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.
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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