Why is a Down Payment So Important?

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It may have been true, once upon a time, that one could buy a house outright without borrowing any money. And while this could still be true for extremely motivated people, it is definitely more common to take out a mortgage (a loan), or have the owner finance the cost when purchasing a home.

When you begin talking with the bank or home owner that will be lending you money, they will ask “How much will you be putting down?” referring to your down payment.

What's the purpose of a down payment?

Simply put, a down payment is a portion of the total cost of the purchase that the buyer pays at the start of the loan. We talk about down payments in terms of the percentage of the total cost of the home.

From the lender’s perspective, a down payment lowers their risk in lending money. Since you’re borrowing less money, the loan is less risky. Having a down payment also shows that you’re serious about your goal of home ownership, which gives the bank/home owner confidence in you. Your ability to save money to put towards a down payment is also a signal that you’ll be able to afford the monthly payments that come with the loan.

3 good reasons to save up for a down payment

A down payment benefits the borrower (you!) as well. Here are just 3 reasons why you might want to make this happen. And they all save you money!

  1. Lower interest rates - As stated earlier, the lender wants to see the borrower put some skin in the game. When you are able to show your willingness to share the risk of the loan, the lender may reward you by reducing the interest rate. This calculator will let you experiment with different interest rates, loan amounts and number of years. This tool can show you what effect interest rates have on the total you’ll pay over the life of the loan.
  2. Fewer fees - Remember that the bank is taking on risk when lending money. One way they lower this risk is through Private Mortgage Insurance (PMI). PMI protects the bank’s investment in the event of a foreclosure – and guess who pays for that protection! Yep, the borrower. When you come to the table with at least a 20% down payment on the purchase, the lender will generally not require you to pay PMI.
  3. Lower monthly payments - This may seem like a no-brainer, but it’s surprisingly easy to get caught up in the now and forget to think long-term. By sacrificing today to save up a larger down payment, you borrow less money. Therefore, your monthly payments will be less! Trust us, your future self will thank you! 
What's next?

While some loans do not require the borrower to have a down payment, it’s a good idea to have at least some money saved up for this purpose. Next time, we’ll be talking about tips for saving up for a down payment. Depending on your situation, it may not be an easy task, but we know that it’s so worth it! Give us a call if you have any questions.

Let us be your Real Estate SOULution! – Where the Soul of Real Estate Meets Integrity & Experience.

Contact us:

www.ibuylouisianahomes.com          225-800-4445

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