If you’ve been keeping an eye on the US real estate market, you may be aware that home prices have skyrocketed over the past year. We can thank the limited inventory and low mortgage rates for fueling this trend.
In September, the median listing price for a home in the United States was $ 380,000, according to Realtor.com. This is up 8.6% from the same period last year, when demand for housing was also high.
Considering the rise in house prices, you might be wondering if it makes sense to put a larger down payment on the property you end up buying. This way, you’ll have less mortgage to take on, which means you’ll pay less interest over the life of your loan. Here are the pros and cons of putting more money into the market today.
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A larger down payment could benefit you
The less money you have to borrow in the form of a mortgage, the less money you spend on interest. Suppose you need a loan of $ 300,000 at 3.2% interest that you will pay off over 30 years. In total, you’ll spend $ 167,300 on interest over the course of paying off your home. If you put an additional $ 20,000 at closing to reduce your loan amount to $ 280,000, you will end up spending $ 156,147 in interest, assuming the same mortgage rate and the same repayment period. That’s over $ 11,000 in savings.
Plus, if you make that larger down payment, you’ll reduce your monthly mortgage payment by $ 86. This gives you more leeway in your monthly budget.
Higher down payment may not be worth it
We have just seen how a higher down payment could translate into a nice saving of interest. But let’s remember that the roughly $ 11,000 in savings we see in the example above is savings over a 30-year period. It’s not like you take advantage of these savings in just one year.
Meanwhile, to take advantage of those $ 11,000 in savings, you’ll need to shell out an additional $ 20,000 up front. This could lead to short-term financial hardship or limit your purchasing power in some other way.
Say you put that extra money into your home as a down payment, but then want to renovate your home within a year of closing your home. You may not be able to afford to make improvements to your home because you have made a larger down payment. Or, you may find yourself in a position where you need to take out a home improvement loan at a higher interest rate than what your mortgage charges you.
In fact, because mortgage rates are so low right now, it usually pays to err on the side of borrowing more, not less. True, you should aim to deposit 20% of the purchase price of your home at closing to avoid having to pay for private mortgage insurance, an expensive premium that makes your monthly payments more expensive. But once you hit that 20% threshold, there is no need to force yourself to make a larger down payment unless you can afford it and want to keep your monthly mortgage payments as low. as possible.
It could pay off to take advantage of low rates
Home prices may be on the rise right now, but because borrowing is still cheap, you don’t necessarily have to push yourself to increase your down payment. While you may have to take out a larger loan due to rising house prices, competitive interest rates should offset that larger loan amount so that your monthly payments are still manageable overall.