If you're signing a conventional mortgage, it's a great thing to be able to make a 20% down payment on your home, even though many lenders will accept less. Doing so allows you to avoid private mortgage insurance, a costly expense that's typically tacked onto your monthly mortgage payments and makes your home more expensive to own.
For many people, coming up with 20% down is a challenge these days due to the state of the market. But what if you have a pile of cash to put into your home down payment, so much so that you're able to pay for 50% of your home upfront?
At first, making a 50% down payment might seem like a good idea. But you should be aware of the drawbacks involved.
The upside of making a 50% down payment
There are two primary benefits to making a 50% down payment on a home. First, the more money you put down, the less you'll pay each month, thereby making those payments fit more easily into your budget.
As of this writing, the average rate on a 30-year mortgage is 6.82%, says Freddie Mac. So let's say you're buying a $300,000 home. If you put down 20%, your monthly principal and interest payments will be $1,567. If you put down 50%, your monthly principal and interest payments will be $979. That frees up $588 a month for you to spend on other things, or just over $7,000 a year.
Furthermore, if you make a 50% down payment on your home, you'll minimize the amount of mortgage interest you have to pay. In this example, putting down 50% leaves you paying a total of $202,613 in interest on your home loan, as opposed to $324,183 with 20% down. That's a savings of $121,570.
The downside of making a 50% down payment
It's easy to see why making a larger home down payment might appeal to you if you can swing it. But the problem with putting 50% down on a home is that you're tying up a lot of money in an asset that isn't very liquid. And that could cause problems if you end up needing cash down the line.
Let's say you make a 50% down payment on a $300,000 home instead of 20%, thereby spending an extra $90,000 upfront. What if you wind up needing to take a full year off of work to recover from an injury or illness and need $90,000 to cover your family's expenses during that time? What if your home ends up needing a series of very expensive repairs that amount to $90,000?
Suddenly, you're looking at having to borrow to access the funds you need. And while a home equity loan may be an option, you might pay more interest on that than a mortgage.
Also, the idea of saving $121,570 in mortgage interest over 30 years might appeal to you. But you should know that the stock market's average annual return over the past 50 years has been 10%. If you put $90,000 into a stock portfolio with that same return, in 30 years, it could be worth $1.57 million. So which would you rather do -- save $121,570 in mortgage interest, or walk away with $1.57 million?
It's definitely worth trying to make a 20% down payment on a home. Doing so could help you avoid the added expense of private mortgage insurance and help you keep your monthly payments to a reasonable level.
But proceed with caution if you're considering putting 50% down on a home. Though there's an upside to going this route, you might lose out financially after all's said and done.
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FAQs
Putting 50% down on a home could minimize the amount of interest you pay throughout the life of your loan. But a 50% down payment may be a lot of cash to tie up in a home, and you might risk having to borrow more expensively down the line.
What are the disadvantages of a large down payment? ›
Drawbacks of a Large Down Payment
- You will lose liquidity in your finances. ...
- The money cannot be invested elsewhere. ...
- It is inconvenient if you will not be in the house for long. ...
- If the home loses value, so does your investment. ...
- You might not have the money to begin with.
If you're wondering what percentage you should put down on a house, 20% down is the rule of thumb, but there is no one-size-fits-all figure. For example, some loan programs require a down payment as little as 3% or 5%, and some don't require a down payment at all.
Is it good to put a large down payment on a house? ›
There are, in fact, many benefits to making a larger-than usual down payment, as we'll discuss below, including: avoiding having to pay for private mortgage insurance. reducing the amount of your monthly mortgage obligation. reducing the total amount of interest you'll owe.
How much house can I afford with $10,000 down? ›
If you have a conventional loan, $800 in monthly debt obligations and a $10,000 down payment, you can afford a home that's around $250,000 in today's interest rate environment.
Is it smart to put 50 down on a house? ›
If you put down 50%, your monthly principal and interest payments will be $979. That frees up $588 a month for you to spend on other things, or just over $7,000 a year. Furthermore, if you make a 50% down payment on your home, you'll minimize the amount of mortgage interest you have to pay.
What is the biggest negative when using down payment assistance? ›
For example, certain programs may have minimum credit score requirements or income limits. Additionally, using down payment assistance could mean you have a larger mortgage to pay off, resulting in higher monthly payments or a longer repayment period.
Is $50,000 a good down payment for a house? ›
It's an ok down payment. A GOOD down payment would be 20% of the purchase price of the home in this case at $350,000 that would be $70,000. If you put a 20% down payment on a home then you do not have to pay for a private mortgage insurance (PMI) EVERY SINGLE MONTH.
Why do sellers like big down payments? ›
Sellers may choose buyers with a larger down payment because of the higher chance that their financing will be approved. A lender may also see a buyer who puts down less money as riskier than one who can put down a larger amount because they are borrowing more money and have less investment in the property.
Is it better to pay off debt or have a bigger down payment? ›
Increasing the down payment will not increase the amount of house for which a lender will qualify you. Using the funds to pay down debt may, because debt is one of the factors used to assess the adequacy of your income, and it also affects your credit score.
On a salary of $36,000 per year, you can afford a house priced around $100,000-$110,000 with a monthly payment of just over $1,000. This assumes you have no other debts you're paying off, but also that you haven't been able to save much for a down payment.
Can I afford a 250k house on 50K salary? ›
You can generally afford a home for between $180,000 and $250,000 (perhaps nearly $300,000) on a $50K salary. But your specific home buying budget will depend on your credit score, debt-to-income ratio, and down payment size.
How much house for $3,500 a month? ›
A $3,500 per month mortgage in the United States, based on our calculations, will put you in an above-average price range in many cities, or let you at least get a foot in the door in high cost of living areas. That price point is $550,000.
Why is it bad to put a big down payment on a car? ›
On the other hand, it could put a strain on your wallet—and if you have bad credit , not all lenders will accept such a large sum as a down payment.
What happens if you put a bigger payment down? ›
The more you put down up front, the less you'll have left to finance over time. So, a larger down payment may help lower your monthly loan payments and reduce the amount of money you spend on interest.
What is usually the result when larger down payments are made? ›
Lower mortgage rate: The less money you borrow as a percentage of the home's value, the less risk your loan poses to the mortgage lender. As a result, larger down payments tend to correlate with lower interest rates.
What would the impact of a larger down payment be on the loan? ›
With a larger down payment, you borrow less, so you have less to pay off. That means your monthly payments will be lower than with a smaller down payment. You'll have lower overall costs. When you borrow less, you'll pay less interest on your loan.
