The consensus is that high house prices are the main barrier to home ownership in Arizona. This notion holds true to some extent, but any honest mortgage broker in Tempe or Phoenix can offer a more realistic explanation: the inability of a person to save to cover out-of-pocket expenses like the down payment.
Before the last housing bubble burst, many homeowners bought properties they couldn’t afford, and lenders were more irresponsible then. The crisis could have been averted if only borrowers were able to provide larger down payments.
Yes, it takes a lot of work to put down a lot of money when taking out a loan, but the effort is worth the trouble. Below are undisputable benefits of paying a large mortgage down payment.
1. The Interest Becomes Cheaper
The greater portion of the property cost you pay yourself up front, the less risk your lender has to take. You can be incentivized with a lower interest rate by simply paying more initially, resulting in smaller monthly mortgage payments.
Furthermore, the size of your loan amount shrinks the bigger the down payment you produce. By borrowing less, you also get to save more money because the interest is calculated based on the principal balance.
2. The Property Options Expand
If you wish to buy a bigger house, bringing more cash into the deal can convince your lender to loan you more. This privilege allows you to unlock more properties on the market.
3. The Income Requirement Goes Down
Many people don’t know that the income requirements of lenders usually go down as down payments go up. If your income is one of your less attractive qualifications, taking the time to save money pays dividends. You may be able to secure the specific mortgage you want by having more cash with you at the negotiating table.
4. The Home Equity Grows Faster
A mortgage down payment turns to home equity after the deal pushes through. In other words, your initial payment doesn’t go away and just become another form of wealth you may tap in the future through other loans.
More equity gives you protection in case land values plummet in the future. Many zero-down mortgages went underwater in the last housing bubble because the homeowners didn’t have sufficient equity to begin with. Although a large down payment can reduce your rate of return when your property increases in value over time, appreciation is just a bonus; security is the real price of putting down as much as you can up front.
5. The PMI Doesn’t Last Long (or Not at All)
Last but not least, less private mortgage insurance (PMI) payment. You can eliminate this charge altogether if you pay a 20% down payment. If it’s not feasible, putting down an amount close to it allows you to attain 80% home equity more quickly to ditch the PMI. If you refinance in the future, you can get rid of this expense faster by bringing some cash in.
Don’t buy a house in a hurry. Take time to save because having the ability to pay a large down payment while still having plenty of cash reserves is proof that you can truly afford your mortgage.