How Large of a Down Payment Should You Place on a Home Mortgage Loan?

If you are looking to buy a house, you may wonder how large of a down payment you should put on the mortgage loan. Is it better for you to put as much as you can afford or as little as possible? Traditionally, lenders expected potential buyers to put down 20% on a home loan. Unfortunately, in today's economy where the average home in the U.S. sells for $178,400, putting 20% down isn't an option for most buyers. There are pros and cons on both sides of the down payment question. Here are some options to help you decide how much you should put down on a home mortgage loan.

A Bigger Down Payment Saves Money

The bigger the down payment, the lower your loan, and subsequent interest charges, will be. This will save you money in the long run. You will also have lower monthly payments which can make the home more affordable. It may also enable you to have a loan for fewer years, such as a 15-year loan instead of a 30-year loan. You will also save because you won't be required to have private mortgage insurance if you put 20% or more down. In short, the more you put down on a home, the less money you will spend down the line.

Less Money Down is an Option

For the average person, putting 20% down on a home isn't an option. Some lenders will give you a home mortgage loan with a smaller down payment but you have to purchase private mortgage insurance (PMI) to protect the loan. It is important for you to weigh your options first, though, because PMI can be expensive.

You are generally required to carry the insurance until you own at least 20% equity into your home, and in some cases lenders require it until you own up to 50% of the equity. PMI generally costs one-half percent of the unpaid balance of your loan. If you purchase a home for $178,000 and make a down payment of 3.5% then your unpaid balance will be $171,800. Multiply the balance by .005 and your PMI will cost $859.00 per year or $71.58 extra per month. That can add up to a substantial amount over the years until you are no longer required to carry it. You may want to wait longer and save more toward a down payment so you won't be required to carry PMI.

Pay Higher Interest Instead

Another option for those who don't have the money for a substantial down payment is to acquire a mortgage loan at a higher interest rate. Some lenders allow you the option of paying a higher interest rate so you don't have to carry PMI. The advantage of this is you are able to deduct the higher interest on your taxes whereas you would not be able to deduct the PMI costs. Compare the figures to see which way is the better option for your particular situation.

Weigh Your Options Carefully

There are many other factors involved in deciding how much you should put down on your home mortgage loan. Is the home such a good deal you simple cannot pass it up? Then it may be worth it to you to purchase the home with a small down payment because the house will increase in value quickly. How long do you intend to live in the home? If you know you will have to sell the home within 5-10 years then it may not be in your best interest to invest a large chunk of your own money into the house. But if this is the home of your dreams and you plan to live in it forever, then you may want to put down a high down payment so you can pay off the home by the time you retire. Weigh all of your options before deciding how much money to put down on a home.

Buying a home is a big investment and a lot of thought should be put into how much you spend and how much cash you invest into the home. Talk with a lender about all of your options and choose the best option that fits you.