When you take out a mortgage, you usually bring some cash for a down payment. The amount you need to put down varies depending on the lender. Some lenders charge 20% on completion, but many accept 5% or 10%. And there are certain mortgages, like that FHA loansthat need even less money to close.
However, it may be in your best interest to invest more money on your home, not less. Here are four reasons for that.
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1. You have a lower monthly payment
The more money you initially invest on your home, the less you will have to spend in the form of a monthly mortgage payment. This, in turn, could make it easier to budget these payments. Additionally, if you plan to add expenses to your budget in the future (e.g., having children), a lower mortgage payment will give you more financial flexibility as your circumstances change.
2. You pay less interest over the life of your loan
Mortgage lenders Make money by calculating interest on the amount you borrow to finance your home. The less you borrow, the less money you spend on interest. For example, let’s say you buy a home worth $ 400,000 and give up 20%, or $ 80,000. If you take out a 3% 30 year mortgage, you will be spending $ 165,688 on interest during your repayment period. But if you invest $ 100,000 instead of $ 80,000, you are spending $ 155,333.
3. You build equity in your home faster
Home equity refers to the portion of your home that you directly own and is calculated by subtracting your mortgage balance from the market value of your home. The more equity you accumulate, the more options you have about home borrowing Home loan or line of credit (HELOC).
4. You avoid an expensive fee
If you take out a conventional loan and don’t pay a 20% down payment on your home, you will have to pay private mortgage insurance, or PMI. PMI protects your lender in the event you default on your loan payments and it can easily cost up to 1% of your loan amount per year. That said, if you have a $ 300,000 mortgage, you could end up paying $ 3,000 a year or an extra $ 250 a month to own your home.
To be clear, you don’t want to tie up too much money in your home, especially if Mortgage rates are competitive as they are today. In other words, if you buy a $ 400,000 home, even if you can, you might not want to drop 50%. But it’s generally worth cutting 20% if you can to avoid PMI. And investing a little more can save you interest and have more financial flexibility later in life.