Purchasing a home is indeed a very big financial decision that one has to make. The usual practice to finance the purchase of a home is to take out a mortgage loan. Again, the size and the monthly mortgage payments that you have to make largely depend upon the down payment amount that you make. For a conventional mortgage loan, the usual down payment amount is 20% of the purchase price of the house. There are some distinct benefits of making a big down payment. Here we briefly discuss about these benefits.
Lowers down mortgage payments
Your monthly mortgage payment amount very much depends upon the down payment amount that you make. The more you put down on your home upfront, the smaller your mortgage payments will be.
Reduces the rate of interest
Your lender takes into consideration your loan-to-value ratio to determine the rate on a mortgage loan. The lower the loan-to-value ratio, better interest rate will be offered by the mortgage lenders. A rise in the mortgage down payment amount reduces the loan-to-value ratio which in turn reduces the interest rate on the mortgage loan.
Do not have to pay mortgage insurance fees
If you take out a conventional mortgage loan and if you do not make the required down payment, then you are required to pay mortgage insurance premiums to your lender. It is to be noted that mortgage insurance is very costly.
Reduces the chance of falling into a crisis
Future is very uncertain. Several unintended contingencies such as illness, job loss etc can hurt your ability to repay your mortgage loan. If you make a large down payment at the present time, it implies that you will have to make less monthly mortgage payment in future.
These are the main reasons why you should try to make a big down payment to your lender.