A large down payment is one of the effective ways to snag the best mortgage rate in Utah, California, or anywhere in America for that matter. Putting down an oversized amount, however, may even work against you.
Remember, cash is a liquid asset; and by turning it into home equity, it essentially becomes illiquid. In addition, small down payments give you increases your rate of return — or the amount you gain should your property appreciate over time. In some cases, having plenty of equity on your house may not give you leverage in avoiding foreclosure.
It’s by all means scary to put down less, but here are what you need to look for to know if you’re overpaying your down payment:
You Qualify for Loans with a Higher LTV
Each mortgage has a down payment requirement. A high LTV, or loan-to-value ratio, means that the lender is more generous to loan you the amount you need. Especially these days that the economy is recovering, low down payment and no money down home loans are rising from their ashes.
If you’re minimum down payment is just 4% of the total loan amount, it doesn’t make sense to make the effort to save up to 20%.
You Are Compromising Your Cash Reserve
One of the biggest drawbacks in putting down such a considerable amount is it may leave your savings in bad shape. Unless you’re seriously rolling in the dough, a 20% down payment can certainly affect your liquidity.
Your Property Is Likely to Appreciate Over Time
If you’re afraid that a low down payment might not keep your head above the water, it pays to study your market’s economy to intelligently predict how home prices would move in the coming years.
For instance, Utah is a hot real estate marketplace today because demand outperforms supply. If the status quo remains the same in the foreseeable future, it may be in your best interest to limit your down payment and keep your cash in your pocket for your other needs.
A down payment can be a testament to your capacity to maintain a mortgage, but paying less doesn’t necessarily mean you’re less capable. For a prudent borrower, steering clear from an oversized down payment is a mark of financial intelligence.