Here’s how to figure out what to do.
- Mortgage rates are way up compared to last year.
- The less of a mortgage you take out, the less interest you’ll pay.
Home buyers were able to enjoy competitive mortgage rates from the start of 2021 to the end. But early this year, interest rates began to climb. And over the past five months, they’ve risen sharply, reaching levels not seen in over a decade.
Of course, the higher borrowing rates are at the time you sign a mortgage, the more interest you end up paying over the life of your home loan. And so you may be wondering whether you should increase the amount of money you put down on your home in light of higher rates. Here’s what you need to know.
The upside of making a higher down payment
The more money you put down when you purchase a home, the less you have to borrow — and the less interest you end up spending on your loan. Also, making a higher down payment allows you to build more equity in your home quickly.
Generally, it’s a good idea to put down 20% of your home’s purchase price at closing. Doing so allows you to avoid private mortgage insurance (PMI) on a conventional home loan, which is a costly premium you get stuck with if you don’t make a 20% down payment. But conventional mortgage lenders will commonly accept a lower down payment of 10% (some might even go as low as 5%).
If you were planning to put down 20% on a home but are able to increase that figure to, say, 25%, you’ll end up with lower monthly payments on your mortgage. And that could make things easier from a budgeting perspective.
The downside of making a higher down payment
The more money you put into a home upfront, the less available cash you’ll have left over. Now if you’re really loaded with cash, that may not be a problem. But otherwise, do remember that homes are a fairly illiquid investment, so it’s hard to convert them to cash.
If you put down 25% on your home instead of 20% but run into a financial crunch a few months later, getting that extra 5% back out of your home won’t be fast or easy. Sure, you could try taking out a home equity loan …….