Four Reasons to Save Up a Down Payment

Mortgage and an auto loan are two of the biggest loans you’ll probably ever borrow. Some lenders require that you put forward a certain percentage of the home or auto cost because lending you 100 percent of the cost is risky for them. While you may find some lenders who don’t require a down payment and others who allow you to pay your own payment with another loan, there are several benefits to coming up with your own cash down payment.

Get a lower interest rate.

Whenever you borrow money, you want to pay it back at the lowest interest rate possible. A lower interest rate typically means lower monthly payments, but it also means that you save money over the long run. Typically, the higher your interest rate, the lower your interest rate will be. This is especially true for mortgages when your interest rate is partly determined by your loan to value ratio: that is the amount of your loan compared to the value of the home. The lower your LTV ratio, the lower your interest rate will be.

Have more equity, sooner.

Equity – which is essentially the value of your home that isn’t subject to lien – isn’t necessarily as useful with a car as with a home. You can borrow against the equity in a home and use it to make home improvements or accomplish other goals. You can also use the equity as collateral for other loans. Or, you can use the equity to help qualify for a refinance.

Get a lower monthly payment.

The more you put down, the less you have to borrow and the less you have to repay. A down payment will help lower your monthly loan costs as opposed to purchasing property at the same price without a down payment. If you’re buying a house and can afford to make a big enough down payment, you can typically avoid a second mortgage and mortgage insurance – a policy that lenders require when your down payment is less than 20 percent.

Because so much of your payment goes toward interest, rather than principle, in the early years of the loan, it can take several years to reach 20 percent equity in the home if you haven’t made a down payment. In those years, you’ll have paid thousands of dollars for mortgage insurance.

To afford a slightly bigger house or better car.

Your income and credit history will allow you to qualify for a certain loan amount. A down payment can help you purchase property that costs a little more than your loan amount. Without the down payment, what you can purchase is limited by how much you’re able to borrow.

Down Payment Tips

That you should save up a down payment is a no-brainer. Actually coming up with the money, which could be $10,000 or more, is the hard part. There are two general ways to save up a down payment: increase your income and decrease your expenses. There are dozens of ways to make those two happen. You can get a part-time job, work overtime, make money from a hobby, or start a side business. You can reduce your living expenses down to the bare minimum, cutting out all the frills.

Divide the amount of the down payment you want to make by the time you want to be there to see what you need to save up each month. That’s your monthly savings goal. Work hard and be diligent with your spending and savings to help save up your ideal down payment.