The Pros and Cons of a Larger Down Payment

A larger down payment on a house could qualify you for a lower interest rate or better mortgage terms, but there are some significant disadvantages, too.
Written by Melanie Krieps Mergen
Reviewed by Melanie Reiff
Putting down a large down payment on a house could help you qualify for a lower interest rate or better terms on a mortgage. But putting a large amount down could also affect how much cash you have on hand for unexpected emergencies.
Buying the house at the right time for the right price is a complicated process that can take years of financial planning. One of the biggest upfront costs of buying a home will be your down payment. How much you initially put down can affect everything from your mortgage interest rate to whether you’ll have to pay private mortgage insurance.
When is it a good idea to put down a larger down payment on a house, and when is it better to pay a small amount down instead? Here to help you weigh the pros and cons is
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Advantages of a large down payment

You’ve probably heard the recommendation that homebuyers should be able to make at least a 20% down payment before purchasing a house. But just what does that look like? 
According to
Zillow’s home value index
, the average home value in the United States in July 2022 was about $355,852
If you were to buy a home at that price and wanted to make a 20% down payment, you’d be writing a check for $71,170.40
Beyond that, you’d still need to cover closing costs, which can range from 2-5% of a home’s purchase price—in this case, that could fall between $1,400 and $3,600.
The expectation to have this kind of cash on hand can feel daunting, especially if you’re a first-time homebuyer or you have limited savings.
However, if you can manage a larger down payment on a home, it’s often in your best interest to do so. Here are some of the benefits that come with making a large down payment on a house:
  • You could get a better interest rate or loan terms: When you make a large down payment, you’ll end up with a better loan-to-value ratio (LTV ratio). As a result, many will offer you a lower interest rate or more ideal terms on your home loan.
  • You’ll have more buying power: If you can put forward a larger down payment, you’ll likely be approved for a higher maximum loan amount, which could make it that much easier to land your dream home. (Of course, it’s still best to make sure you could actually afford the mortgage loan amount you’ve been approved for.)
  • You could have a lower monthly mortgage payment: The higher your down payment, the less you’ll have to take out in a loan—which means you could enjoy a lower monthly mortgage payment. (Refinancing down the line can further decrease that payment.)
  • You could avoid private mortgage insurance (PMI): Lenders will often require borrowers making smaller down payments to pay for PMI, which could cost you thousands of dollars more in the long run. With a conventional mortgage, this is usually the case for down payments of less than 20% of the home’s purchase price.
  • You’ll have more home equity: The larger your down payment is, the more equity you’ll have in your own home from the get-go. That could make it easier to qualify for certain types of home equity loans in the future if the need arises.

Disadvantages of a large down payment

While making a large down payment on a house can come with certain incentives, paying too much out of pocket could actually make your financial circumstances more difficult. 
Here are some of the potential cons of a large down payment:
  • You’ll have fewer cash reserves: If you make a large down payment, you’ll have less money on hand in the case of a future emergency. It’s extremely important to make sure you’ll still have enough cash for an emergency fund as well as other living expenses.
  • It might not be ideal if you don’t plan to live in the home very long: If you don’t see this house as your forever home and you only plan to live in it for a few years, it might not be worth investing a larger down payment.
  • You won’t be able to make other investments with the money: Putting more money toward a down payment might not be worth it if you could use the extra cash to turn a greater profit through investing in the stock market or other revenue sources. 
  • You could end up losing money if your home decreases in value: Housing market conditions and home prices are always subject to fluctuation—what goes up can also come down. If local real estate values where you live end up depreciating enough when you’re ready to sell your home, you could end up losing money on your investment.

What’s the average down payment amount?

What constitutes an average down payment amount can vary depending on the type of mortgage you’re seeking, and down payment requirements vary from lender to lender. For traditional mortgages (or conventional loans), lenders often require a minimum down payment of at least 20% of the home’s purchase price.
However, depending on the mortgage lender and type of mortgage you choose, you may be able to put down a smaller down payment through government loan programs or down payment assistance programs. 
For example, the required down payment for
Federal Housing Administration loans (FHA loans)
can be as low as 3.5% of the home sale price if you meet the necessary credit score requirements. 
Private lenders may still opt to approve you for a mortgage with a small down payment if you agree to pay
private mortgage insurance (PMI)
—but you might have less ideal loan terms than you would with a larger down payment.
With certain lending options from mortgage programs like those offered by
Veterans Affairs (VA)
and the
United States Department of Agriculture (USDA)
, it’s possible a down payment may not be required at all.

Should you put a larger down payment on a house?

What percent down should you actually put toward your home purchase? It depends on your short-term and long-term goals, plans, and your financial situation. 
If you plan to buy a house but you’re still working on building up your savings, it might be best to opt for a lower down payment. You may end up with higher interest rates, but you’ll likely have a larger emergency fund for any unexpected expenses (and it’s possible you could still find lower interest rates through a refinance later on).
On the other hand, if you’re in good financial standing and you plan to buy a home to live in for a while, putting down a large down payment could help you avoid PMI and get you better mortgage terms, which could end up saving you thousands in the long run.
Key Takeaway The amount you choose for your down payment should leave you with a comfortable amount of savings for other living expenses and an emergency fund for things like home repairs.

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In addition to your down payment, your
homeowners insurance
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Borrowers who are able to make larger down payments can often qualify for lower interest rates, which could allow you to pay less interest over the life of the loan.
Potential incentives like lower interest rates, better mortgage terms, lower monthly payments, and more equity can make a large down payment on a house worth it—but only if you’re still left with enough savings to cover your other living expenses and potential emergencies.
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