Toronto: When it comes to home mortgage, a low down payment is frequently advertised as a benefit (or any other type of financing for that matter). While the idea of paying little or nothing upfront is appealing, is it always the best option? Consider the advantages and disadvantages of making a sizable down payment on a home.
The Disadvantages of a Large Down Payment
The following are some of the disadvantages of making a large down payment on a home:
- Your financial situation will deteriorate. If your finances are tight at the moment, you may only have a limited amount of cash on hand. If you invest a large portion of it in the down payment, you may find that you do not have as much available for emergencies. Additionally, you may need to exercise greater caution with your monthly budgeting. This can be quite inconvenient in some instances.
- The funds cannot be invested in any other way. While a home is an investment, the money you invest in the down payment is not available for other investments. It cannot be used to trade stocks or other assets or to finance a business venture. It is securely locked inside the house. This may restrict your opportunities to earn money for the future.
- It’s inconvenient if you’re not going to be home for an extended period of time. If you intend to stay in the house for only a few years, it may not make sense to invest a sizable portion of your financial resources in it. Given that you do not intend to make the home a long-term investment, pouring cash into it is illogical.
- If the value of the home decreases, so does the value of your investment. While we hope that the properties in which we invest will appreciate in value, this is not always the case. You may find yourself in a situation where you’d rather sell the home than see its value continue to decline. The less money you invest, the smaller your losses will be.
- You may be short on funds to begin with. Finally, there are instances when you may be unable to make a substantial down payment at all. It could be beyond your financial means. That is why programmes such as HOME READY and FHA mortgage with low down payments are ideal for first-time homebuyers who may not have a lot of money saved up.
The Benefits of a Sizable Down Payment
While there are numerous advantages to making a small down payment or none at all, there are also financial advantages to making the largest down payment possible. Here are a few examples:
- As a lower risk, you may be able to negotiate a lower interest rate and more favourable loan terms. Lenders believe that when you invest more in a home, you are less likely to default. To begin, you have established financial capability. Second, you’ve already made an investment in the home, which adds to your motivation. Thirdly, because the balance remaining to be paid is smaller, you are more likely to follow through, even if unexpected changes occur in your future.
- You can purchase a more expensive residence. Jumbo mortgage frequently require a larger down payment. If you’re looking for a luxury home, making a larger down payment may help you qualify for a jumbo mortgage on the home of your dreams.
- You’ll be able to pay off the mortgage sooner, which will save you money on interest. This is an excellent reason to make a sizable down payment. It could ultimately save you thousands of dollars in the long run. If it does not jeopardise your finances in the short term, it makes financial sense to avoid those future payments.
- Your monthly payments will be reduced as a result. Another advantage of paying as much of your mortgage as possible in advance is that your monthly payment may be significantly reduced in the future. This not only makes it easier to manage your finances in the future, but it also alleviates some of the stress associated with routine budgeting.
- You may be able to avoid paying private mortgage insurance if you qualify (PMI). Finally, if your down payment is extremely low, you may be required to pay PMI on a monthly basis. This, too, can add up to a significant sum of money over the years.
The Most Appropriate Down Payment Amount Is Whatever Is Appropriate for Your Financial Situation
Therefore, should you make a sizable down payment on your home? It is entirely dependent on your financial situation and objectives. If you do not have a large down payment at the moment, a large down payment may place an undue strain on your budget. If, on the other hand, you can afford a substantial down payment, you can potentially save a lot of money on interest and PMI, and your monthly mortgage payments will be more manageable.