If you're signing a conventional mortgage, it's a great thing to be able to make a 20% down payment on your home, even though many lenders will accept less. Doing so allows you to avoid private mortgage insurance, a costly expense that's typically tacked onto your monthly mortgage payments and makes your home more expensive to own.
For many people, coming up with 20% down is a challenge these days due to the state of the market. But what if you have a pile of cash to put into your home down payment, so much so that you're able to pay for 50% of your home upfront?
At first, making a 50% down payment might seem like a good idea. But you should be aware of the drawbacks involved.
The upside of making a 50% down payment
There are two primary benefits to making a 50% down payment on a home. First, the more money you put down, the less you'll pay each month, thereby making those payments fit more easily into your budget.
As of this writing, the average rate on a 30-year mortgage is 6.82%, says Freddie Mac. So let's say you're buying a $300,000 home. If you put down 20%, your monthly principal and interest payments will be $1,567. If you put down 50%, your monthly principal and interest payments will be $979. That frees up $588 a month for you to spend on other things, or just over $7,000 a year.
Furthermore, if you make a 50% down payment on your home, you'll minimize the amount of mortgage interest you have to pay. In this example, putting down 50% leaves you paying a total of $202,613 in interest on your home loan, as opposed to $324,183 with 20% down. That's a savings of $121,570.
The downside of making a 50% down payment
It's easy to see why making a larger home down payment might appeal to you if you can swing it. But the problem with putting 50% down on a home is that you're tying up a lot of money in an asset that isn't very liquid. And that could cause problems if you end up needing cash down the line.
Let's say you make a 50% down payment on a $300,000 home instead of 20%, thereby spending an extra $90,000 upfront. What if you wind up needing to take a full year off of work to recover from an injury or illness and need $90,000 to cover your family's expenses during that time? What if your home ends up needing a series of very expensive repairs that amount to $90,000?
Suddenly, you're looking at having to borrow to access the funds you need. And while a home equity loan may be an option, you might pay more interest on that than a mortgage.
Also, the idea of saving $121,570 in mortgage interest over 30 years might appeal to you. But you should know that the stock market's average annual return over the past 50 years has been 10%. If you put $90,000 into a stock portfolio with that same return, in 30 years, it could be worth $1.57 million. So which would you rather do -- save $121,570 in mortgage interest, or walk away with $1.57 million?
It's definitely worth trying to make a 20% down payment on a home. Doing so could help you avoid the added expense of private mortgage insurance and help you keep your monthly payments to a reasonable level.
But proceed with caution if you're considering putting 50% down on a home. Though there's an upside to going this route, you might lose out financially after all's said and done.
Alert: our top-rated cash back card now has 0% intro APR until 2025
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee! Click here to read our full review for free and apply in just 2 minutes.
FAQs
Putting 50% down on a home could minimize the amount of interest you pay throughout the life of your loan. But a 50% down payment may be a lot of cash to tie up in a home, and you might risk having to borrow more expensively down the line.
What does 50% down payment mean? ›
A down payment is a sum a buyer pays upfront when purchasing a home or car and is a percentage of the total purchase price. The higher the down payment, the less the buyer will need to borrow to complete the transaction, the lower their monthly payments, and the less they'll pay in interest over the long term.
What happens if you put less than 20 down on a home? ›
However, a smaller down payment means a more expensive mortgage over the long term. With less than 20 percent down on a house purchase, you will have a bigger loan and higher monthly payments. You'll likely also have to pay for mortgage insurance, which can be expensive.
What are the disadvantages of a large down payment? ›
Drawbacks of a Large Down Payment
- You will lose liquidity in your finances. ...
- The money cannot be invested elsewhere. ...
- It is inconvenient if you will not be in the house for long. ...
- If the home loses value, so does your investment. ...
- You might not have the money to begin with.
A conventional loan down payment could be as little as 3 percent. FHA loans require as little as 3.5 percent, and VA loans and USDA loans have no down payment requirement at all. Most homeowners don't put 20 percent down.
Is it smart to put 50% down on a house? ›
Putting 50% down on a home could minimize the amount of interest you pay throughout the life of your loan. But a 50% down payment may be a lot of cash to tie up in a home, and you might risk having to borrow more expensively down the line.
What is the biggest negative when using down payment assistance? ›
Most plans are operated by local governments or nonprofit groups and provide assistance buyers can put toward a down payment or closing costs.
- You May Pay More Over Time. ...
- You May Not Qualify. ...
- You Can Overextend Yourself. ...
- Closing May Take Longer. ...
- You May Have Occupancy Requirements.
You'll usually need a credit score of at least 640 for the zero-down USDA loan program. VA loans with no money down usually require a minimum credit score of 580 to 620. Low-down-payment mortgages, including conforming loans and FHA loans, also require FICO scores of 580 to 620.
What is the lowest down payment for a house? ›
A Federal Housing Administration (FHA) Mortgage has a minimum down payment of only 3.5%. It's available to all qualified buyers, regardless of income level.
Is it better to put down a large down payment on a house? ›
A larger down payment means it's more likely you'll receive a mortgage since you are less risk to a lender. It also means you will own more of the value of your home, and a lower loan-to-value ratio (LTV) may help you qualify for lower interest rates and fewer fees.
If you have a conventional loan, $800 in monthly debt obligations and a $10,000 down payment, you can afford a home that's around $250,000 in today's interest rate environment.
What is a good down payment for a 200k house? ›
Conventional mortgages, like the traditional 30-year fixed rate mortgage, usually require at least a 5% down payment. If you're buying a home for $200,000, in this case, you'll need $10,000 to secure a home loan.
Is it better to put more money down on a house or buy down interest rate? ›
If you are buying a home and have some extra cash to add to your down payment, you can consider buying down the rate. This would lower your payments going forward. This is a particularly good strategy if the seller is willing to pay some closing costs.
What is the property 50% rule? ›
The 50% rule advises investors to estimate a property's operating expenses will amount to roughly half of its gross income. While this estimation proves helpful in projecting rental property cash flow, it is not a flawless measurement and should only ever be used as a starting point for further research and analysis.
Why not put 20 down on a house? ›
Downsides of a 20% Down Payment
Won't provide as much benefit when rates are low: If mortgage rates are low, you could potentially put that money to better use by investing it or paying down high-interest debt. That could be the case even if you have to pay PMI.
How much does a mortgage payment increase for every $1000? ›
In general, estimate about $5 per $1,000 or $20 per $5,000 increase in the purchase price. Although it does differ slightly as interest rates fluctuate, this is the easiest way to estimate changes in your monthly payment.
Is 50% down payment good for a car? ›
When you make a really large down payment, say around 50%, you're going to see your auto loan really change for the better. Making a down payment as large as 50%t not only improves your chances for car loan approval, it also: Reduces interest charges. Gives you a much smaller monthly payment.
How do down payments work? ›
A down payment on a house is the money a buyer pays upfront to complete the real estate transaction. Down payments are typically a percentage of a home's purchase price and can range from 3% – 20% for a primary residence.
What is the difference between a deposit and a down payment? ›
Where Deposit money is placed as a type of promise to complete the transaction, the down payment is related to the amount of total liquid capital the purchaser has, or is willing to use, to facilitate the financing of the total purchase price.
Is it a good idea to have a low down payment? ›
A lower down payment could mean you're able to buy a home months (or years) earlier. Saving up 20% of the purchase price of a home —at today's high prices — can take a long time for many of us. If you spend less on the down payment, you'll free up funds to cover the myriad of other transaction-related expenses.
