Tradition states that you should try to put down about 20% of the price of the property as a down payment, but some people choose to put more money down upfront, while others prefer to put out as little as possible. Take a look at the following factors to get an idea of why this is so.
The More You Put Down the Less You Have to Repay
Quite obviously, the larger your down payment, the smaller the loan you have to take. This is because your down payment is subtracted from the total cost of the property and then you are loaned the difference to close the purchase. Larger down payments make some people feel good because they like the security of knowing that they have less outstanding to repay.
A Larger Down Payment Equals a Smaller Monthly Payment
Another benefit of paying a bigger chunk down upfront is that it means your monthly installment is likely to be less. The only way your monthly mortgage payment will not be less with a bigger down payment is if you decide to take the loan for a shorter term, which is also a benefit because it means you pay less interest over the life of the loan.
Bigger Down Payments Can Save on Loan Fees
Making a bigger down payment can also net you savings on loan fees because they are calculated as a percentage of the total size of the loan. If you put more money down upfront, it means your loan is smaller and your loan fees are also smaller by extension. You also stand to save on Private Mortgage Insurance (PMI) fees which the lender can enforce to cover any shortfall in the size of your down payment.
A Bigger Down Payment Means You Have Less to Invest
Finally, the more money you put down upfront, the less you have available to invest. This is one of the main reasons that people hold back from making a larger down payment, because it reduces their flexibility to enter into additional investments or to simply cover expenses in case of an emergency. Simply put, if you make a smaller down payment you can invest the difference to generate a higher yield. Instead of putting $10,000 more on your home loan at an interest rate of 8% you can purchase some stocks that are projected to yield 12%.
The size of your down payment depends on a number of factors including; how much you value your ability to enter into other investment positions, the psychological effect of taking out a smaller loan and the real financial benefit of paying lower loan fees.