Should You Put More Money Down —or Keep the Cash?
That depends. A better question is: What is the best use of my available cash?
What Does a Larger Down Payment Do?
Putting more money down will:
Reduce your loan amount
Lower your monthly payment
Reduce interest expense
Potentially reduce or eliminate mortgage insurance
Create more immediate equity
Those are meaningful benefits. If you've got plenty of reserves left afterward, a larger down payment may make perfect sense and the be the right decision for you.
But Your Cash Has Value, Too
Suppose you have $100,000 available. You could put every possible dollar into the house. But what happens when the air conditioner needs to be replaced, your car needs a transmission repair, or your water heater has decided it has done everything it can do in it's live and quits on you?
Welcome to homeownership, and life. Cash reserves provide flexibility and give you options to manage unexpected expenses without incurring new and additional debt.
The Payment Difference May Surprise You
Sometimes buyers assume putting another $25,000 or $50,000 down will dramatically change their monthly payment.
It certainly lowers it—but you should calculate how much.
If keeping an additional $25,000 in reserves only increases the payment by an amount you're comfortable with, preserving that liquidity may be valuable. For another borrower, lowering the monthly payment may be far more important and the difference between affordability, and not. Neither answer is automatically right.
For context, borrowing an additional $25k on a 30yr loan based on a 6.75% interest rate, the increased principal + interest payment is only ~$160/mo.
What Else Could the Money Do?
Cash you don't put into the home can remain available for:
Emergency reserves
Investments
Home improvements
Moving expenses
Future opportunities
Paying off higher-interest debt
That doesn't mean keeping cash is always better. It means your down payment is part of a larger financial plan.
Don't Become House Rich and Cash Poor
I've seen buyers become so focused on maximizing the down payment that they leave themselves with almost nothing after closing. Technically, they own more of the house.
They just can't afford anything inside the house. That's not usually the goal.
The Investment perspective is considerable as well.
Assume that you were to invest the $25k from the above scenario, and strategically invest it into the markets and can earn 10% interest on it (over a 40-yr period, the S&P500 has worked out to an average between 10%-11%) you would be earning $200/mo in additional interest income. And that interest compounds over time, earning you more and more as time goes one. And don't forget that the increased payment includes both principal and interest, so you're not paying the entire $160 in added interest.
Key Takeaway
There isn't one perfect down-payment percentage.
The right amount depends on your:
Monthly cash flow
Emergency reserves
Other debts
Investment strategy
Housing Plans
Financial goals
Instead of automatically asking: "What's the most I can put down?"
Try asking: "How much should I put down while still keeping the financial flexibility I want?"
That's a much better strategic mortgage question.
Your home should be part of your financial plan. It shouldn't consume the entire thing.
-Brian Kimball, Sr. Mortgage Advisor/Team Leader, The Lighthouse Group at Waterstone Mortgage