Downpayments

A downpayment is an initial payment often required for approval when making a large purchase. This is different than a security deposit. Typically a downpayment is a upfront payment in cash, check, money order, or wire transfer but could be land if pursuing a construction loan. The downpayment amount often influences the interest rate on a loan.

Downpayments are often, but not always, a required component in obtaining a loan. A 100% downpayment is the same as buying the asset entirely up front. This is obviously is one way to avoid interest fees altogether. “Zero down” loans are enticing but have the drawbacks as well. 

More Down = Lower Interest Rate

Generally speaking, a larger downpayment is rewarded with a lower interest rate and this reduces your interest fees over the long term. A larger downpayment equates to less risk to the lender since there’s a lower balance remaining after the downpayment is applied. 

Borrowing on credit isn’t always a bad decision. There are pros and cons depending on your situation. There isn’t a right or wrong answer that suits everyone but there could be a best answer that suits your situation and ‘your situation‘ could change over time.

Responsibility is Rewarded

Developing a history of making timely payments can boost your credit score and help you get lower borrowing rates on future purchases and even help reduce your home/auto insurance rates. 

Refund my Fees

Is someone giving you money for the downpayment?

This could be considered a “gift” which comes along with red tape for the donor and you (the recipient). It’s not as simple as a friend or parent giving you some money and you using it for, or as part, of the downpayment. Make sure to research this topic and adhere to the laws in your state if planning to go this route. 

How Much Down?

Refund my Fees

Turn your knowledge into money

If you have a passion about a niche or specific topic you may be able to earn some passive income by creating and selling an e-book. It’s easier than you might think. Learn more.

Refund my Fees

Job Interview Preparation

Like most things in life, you get out of it what you put into it. Preparation is key to put your best foot forward during a job interview. Practice, repetition, presentation, body language, choice of words, and confidence. Learn more

Refund my Fees

Powerful Cover Letters

A prerequisite for a job interview usually requires to critical documents: RESUME and COVER LETTER. Draft a strong but concise cover letter. Keep it simple yet effective. Learn more.

How much should I put down?

A couple examples are covered later at the bottom of this page to help you analyze simple scenarios.

A downpayment is a one-time upfront payment. One key factor to consider is the amount you can afford to put down. A higher down payment equates to a smaller amount borrowed which equates to lower total interest fees over the life of the loan. A lower interest rate applied to your balance also equates to lower monthly payments.

Higher Downpayment

Lower rates

You might qualify for a lower interest rate if you put more down. The lender takes a low risk when they already have more of your money and the risks of you defaulting on your loan is lower if there is less to pay back. It’s important to run the scenarios to understand the whole dollar impact of various downpayment and interest rates for each pay period and the life of the loan. Interest may also be tax deductible which means you deduct the interest paid from your income and reduces your taxable amount.

Avoid Protective Mortgage Insurance (PMI):

When buying a home with a conventional loan be aware of PMI fees. A downpayment of 20% or more normally avoids this fee. Again, the principle of PMI is to protect the lender taking on more risk with <1/5 down. The cost of PMI normally depends on the type of loan, down payment amount, length (term) of loan, and your credit score. Typical rates are 0.5-6% annually of the original loan amount. 

And if you can’t come up with the 20% down (which is not uncommon) you may be able to take out another loan at a lower interest rate than the PMI fees. And once you begin making payments and you reach the milestone of paying 20% of the principal then contact your lender to ensure the PMI fees are removed (this should happen automatically). 

PMI Tax Deductions

PMI was tax deductible only through the 2017 tax year as an itemized deduction the Further Consolidated Appropriations Act, 2020, extended the deduction through December 31st, 2020. It remains to be seen whether the future beyond 2020 holds the same but for now this premium can be deducted on your taxes….and it is retroactive for 2018 taxes. 

You’ll typically pay PMI in addition to your monthly mortgage payment. Some lenders may allow you to pay one lump sum or a combination of both. Obviously this is in addition to your loan interest rate and in itself can add up to a lot of money the longer you have to pay it. In summary, a downpayment closer to the 20% mark relieves you of these PMI fees sooner than later (assuming you make payments to get to the 20% mark). 

Lower Monthly Payment

Low monthly payments may be important to you or you can shorten the length of the loan if you put more down and can afford higher monthly payments. 

Shorter Loan Duration

It may be possible for you to reduce the length of time over which you payback your loan. Run the calculation and if you can affford a higher monthly payment you can shorten the loan duration which reduces interest fees over the term of the loan. In some cases you may be able to make voluntary supplemental payments.

Therefore if you prefer not being locked into a higher monthly payment, you may choose to extend the loan or do whatever is necessary to reduce your monthly obligation with a plan to make your own additional payments at your convenience to chip away at the principal balance. This also reduces the interest fees paid in the long term but most loans are based on amortized interest and therefore a bulk of the interest is paid in the early periods of the loan and interest fees (not the interest rate necessarily) reduce over time. 

Equity

You may be able to borrow against assets if you need money in the future. Most commonly we hear about this as home equity. A larger downpayment helps to create equity sooner but it doesn’t guarantee any equity. If the asset (home in this case) value depreciates significantly the equity could dissolve. 

For simplicity in example, if you have a $300,000 appraisal on our home and owe $100,000 on your loan principal, you have $200,000 in equity. This is value you “own” and on which you may be able to get another loan. In this case called a home equity loan or line of credit (HELOC) to go towards another purchase.

You can use this loan to fufill a variety of wish-list items from home improvements, education, emergency expenses, and investments.  Depending on the HELOC interest rate you can choose to pay off higher interest loan(s), consolate them into one HELOC, and further reduce your overall interest fees. 

Lower Down Payment

Be careful with lucrative offers that allow “no money down” or “zero down” because doing this will often not get you the lowest borrowing rate or other benefits. In this case the lender is bearing all the risk for collecting the entire amount of the loan after they allow you to take possession of their asset. The lenders reward for taking that risk is earning more long term interest fees from you. But a smaller down payment can have the following advantages:

Investments

Save your money and put it to work for potentially higher interest than your interest rate. For example, if you can make 3.5% on an investment and your loan with a minimal down payment is 2%, then you may consider investing the money that otherwise would be applied to a downpayment. However, almost all investments have risk and do not guarantee any particular result. 

Rainy Day Fund

You should consider keeping cash (or cash equivalents) in reserves with near immediate accesss to cover for unplanned expenses and emergencies.  Consider other loans you may have and the ability to cover those obligations and others if there is a “rainy day”. Consider that level of security from your exising source(s) of income such as your job. 

Make it Happen

Perhaps you only have so much money available to apply toward a downpayment and you don’t have time to accumulate more money. A lower downpayment can get you that asset sooner but understand the long term implications. 

Credit Score

Credit agencies typically reward proven performance using available credit. That means having a lower downpayment and paying off the balance over a longer period could actually boost your credit score. A higher credit score usually equates to lower borrowing rates in the future for other assets. On the flip-side this can negatively affect your debt-to-income ratio which generally lowers a credit score. It’s a fine balance of both and try not to optimize one metric too much while sub-optimizing another at the same time.  

Loan Calculator

This calculator is designed with a lot of features that many calculators leave out. This allows you to model more scenarious to get a more complete value of your monthly obligations. The purpose here is to illustrate the change in mortgage payments when applying various downpayments. 

Some of these fields will be held constant so the only input that we will vary is the amount of the downpayment. 

Assumption 1:

  • Home Purchase Price goes in the ‘Home value’ field: Assume $300,000.
  • Apply a downpayment of 20% for $60,000 (to avoid PMI premiums). The loan amount is assumed to be $240,000.
  • APR convential loan rate of 4.0%
  • PMI rate is 1.0% 
  • Real Estate Taxes: $200/mo or $2,400/yr
  • Homeowners Insurance: $100/mo or $1,200/yr
  • NOTE: Assume you pay all closing costs of $3,000 at the time of closing so enter $0 in the Closing Costs field. If you roll the Closing Costs into the loan it increases the total loan amount and the 20% threshold to avoid PMI goes up and the total interest paid over the term of the loan increases. This is very important to consider because it’s like a downpayment since you either pay it upfront when closing the deal or add it to the loan amount (or negotiate to have the seller pay them or a portion of them).  

The monthly payment is $1,446 which is a combination of Principal & Interest of $1,146/mo + Taxes, Insurance, & PMI of $300/mo (which the PMI is $0). 

Assumption 2:

  • Everythings the same except the downpayment is $30,000 (10% of loan amount). 

The monthly payment grows substantially to $1,814/mo which is a combination of Principal & Interest of $1,289 + Taxes, Insurance, & PMI of $525- which the PMI is $225. That means you will pay PMI fees of $225/mo to start and it gradually does down to $200/mo to the point you’ve paid 20% of the home purchase price ($30,000 more on principal). That’s ~$15,000 in total PMI fees! At least through 2020 the fees are tax deductible.

Be careful with amortization calculators. They usually only show Principal & Interest payments. At some point you’ll have insurance and taxes to pay too. Usually you have the option to pay insurance and taxes directly to avoid rolling them into the monthly payment with your house. Either way it still amounts to an annual obligation. Sometimes you can get a better insurance rate if pay a lump sum over a year and therefore keep it separate from your home loan.  

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments

The Latest

Deadline 10/14/20: Did you buy or own a GE Microwave?

Deadline 10/14/20: Did you buy or own a GE Microwave?

You may be entitled to benefits if you purchased or owned a GE Profile or GE Monogram Brand Microwave Oven. The court approved a Settlemen on July 27, 2020 and it appears to be too late to exclude yourself from a claim but you still could get a benefit as part of the...

ATTN: Contact Lens Buyers – must act by 12/4/20

ATTN: Contact Lens Buyers – must act by 12/4/20

Did you purchase contact lenses online from 2004 through 2019? You have until December 4, 2020 to complete a Claim Form to be considered to receive a payment from the Settlements in Thompson v. 1 800 Contacts, Inc., Vision Direct, Inc., Walgreens Boots Alliance,...

Six Sigma & Lean Manufacturing

Six Sigma & Lean Manufacturing

Six-Sigma-Material.com is a popular source for free content. The site focuses on the the methodolgies and tools used within SIx Sigma and Lean Manufacturing. The site focuses ont the DMAIC path. It covers the most commonly used tools from start to finish. Each topic...

Can you claim a Tax Education Credit?

Can you claim a Tax Education Credit?

The IRS has a 10 minute quiz to help determine whether you may be able to claim a Tax Education Credit. This will help you determine if you're eligible for certain educational credits or deductions including the American Opportunity Credit, the Lifetime Learning...

Major US airlines drop Change Fees

Major US airlines drop Change Fees

Change Fees account for a respectable amount of income for the airlines. However these benefits seem to outweigh the more dire need to enticing passenger bookings. This large source of revenue has already been curtailed by American Airlines, United Airlines, Delta...

Reporting Phone Fraud

Reporting Phone Fraud

Reporting Phone Fraud and violations related to the FTC”s National Do Not Call Registry.

Tuition Free Schools

Tuition Free Schools

Free tuition does exist and may become more popular in the future. Of course these are few and far between and come with qualifications. The catch is that "free" doesn't equate to covering all educational expenses. But it's worth the look if you're in the hunt. The...

SiriusXM®

SiriusXM®

Reoccurring Subscriptions Reoccurring subscriptions can be sneaky ways for companies to continue siphoning your money when you no longer need the service. You most likely signed up for it but in reality you no longer use the subscription or you can get by with a lower...

DNA Testing

DNA Testing

National DNA Day – April 25, 2020

Senior Advantage – another option to save money

Senior Advantage – another option to save money

Here's another on-line option for Seniors that provides various tools, coupons, discounts, and more to help you save money, stay informed and live a healthier life. "Senior Advantage customers get access to a deal portal, budgeting tool, 365-day personalized meal...

Deadline 10/14/20: Did you buy or own a GE Microwave?

You may be entitled to benefits if you purchased or owned a GE Profile or GE Monogram Brand Microwave Oven. The court approved a Settlemen on July 27, 2020 and it appears to be too late to exclude yourself from a claim but you still could get a benefit as part of the...

ATTN: Contact Lens Buyers – must act by 12/4/20

Did you purchase contact lenses online from 2004 through 2019? You have until December 4, 2020 to complete a Claim Form to be considered to receive a payment from the Settlements in Thompson v. 1 800 Contacts, Inc., Vision Direct, Inc., Walgreens Boots Alliance,...

Six Sigma & Lean Manufacturing

Six-Sigma-Material.com is a popular source for free content. The site focuses on the the methodolgies and tools used within SIx Sigma and Lean Manufacturing. The site focuses ont the DMAIC path. It covers the most commonly used tools from start to finish. Each topic...

Can you claim a Tax Education Credit?

The IRS has a 10 minute quiz to help determine whether you may be able to claim a Tax Education Credit. This will help you determine if you're eligible for certain educational credits or deductions including the American Opportunity Credit, the Lifetime Learning...

Major US airlines drop Change Fees

Change Fees account for a respectable amount of income for the airlines. However these benefits seem to outweigh the more dire need to enticing passenger bookings. This large source of revenue has already been curtailed by American Airlines, United Airlines, Delta...

Reporting Phone Fraud

There are various types of phone fraud from cramming, scamming, and spoofing. One of the most annoying, and seem to be growing, are robocalls. One way to quickly help mitigate the problem is sign up on the FTC's National Do Not Call Registry. Go to the FTC Do Not Call...

Tuition Free Schools

Free tuition does exist and may become more popular in the future. Of course these are few and far between and come with qualifications. The catch is that "free" doesn't equate to covering all educational expenses. But it's worth the look if you're in the hunt. The...

SiriusXM®

Reoccurring Subscriptions Reoccurring subscriptions can be sneaky ways for companies to continue siphoning your money when you no longer need the service. You most likely signed up for it but in reality you no longer use the subscription or you can get by with a lower...

DNA Testing

Many of the DNA testing companies are offering discounts due to the growing popularity and competition. Visit our new section regarding DNA testing to review the topic and options. Get the most our of your money and determine which type of test best suits your goals....

Senior Advantage – another option to save money

Here's another on-line option for Seniors that provides various tools, coupons, discounts, and more to help you save money, stay informed and live a healthier life. "Senior Advantage customers get access to a deal portal, budgeting tool, 365-day personalized meal...

FLORIDIANS: High potential $ reward – low effort.

UNCLAIMED PROPERTY There's a 1 in 5 chance you have Unclaimed Property according to the Florida Dept. of Financial Services website, The state paid out $323,000,000 last year. It takes just a few minutes to search for yourself, a friend, or family member. This is too...

ATTN: Shelby Twp, MI past and current residents

There has been a Class Action settlement of $6,000,000 related to over charging on water and sewer services from January 1, 2013 - June 30, 2020. This applies to past and current residents and possibly any properties with payments within the applicable timeframe. You...

List of Active Class Action Lawsuits

ClassAction.org claims to maintain a current list of open lawsuits and investigations. The goal of this section is to provide consumers with a comprehensive resource on class action and mass tort lawsuits. Attorneys are either actively filing these cases or...

Federal Student Loans relief extended to 12/31/20

On March 20, 2020, the Secretary of Education directed the office of Federal Student Aid to provide the following relief on U.S. Department of Education held federal student loans: suspend loan paymentsstop collections on defaulted loansset interest rates to 0% for a...

Section 301 Tariff Update

Extension on Certain Exclusions until 12/31/20 for List 3 and List 4 In terms of LIST 3, on September 10, 2020, three importers filed a complaint at the U.S. Court of International Trade (CIT), HMTX Industries LLC et al. v. United States, which challenges the...

Deadline 10/14/20: Did you buy or own a GE Microwave?

You may be entitled to benefits if you purchased or owned a GE Profile or GE Monogram Brand Microwave Oven. The court approved a Settlemen on July 27, 2020 and it appears to be too late to exclude yourself from a claim but you still could get a benefit as part of the...

ATTN: Contact Lens Buyers – must act by 12/4/20

Did you purchase contact lenses online from 2004 through 2019? You have until December 4, 2020 to complete a Claim Form to be considered to receive a payment from the Settlements in Thompson v. 1 800 Contacts, Inc., Vision Direct, Inc., Walgreens Boots Alliance,...

Six Sigma & Lean Manufacturing

Six-Sigma-Material.com is a popular source for free content. The site focuses on the the methodolgies and tools used within SIx Sigma and Lean Manufacturing. The site focuses ont the DMAIC path. It covers the most commonly used tools from start to finish. Each topic...

Can you claim a Tax Education Credit?

The IRS has a 10 minute quiz to help determine whether you may be able to claim a Tax Education Credit. This will help you determine if you're eligible for certain educational credits or deductions including the American Opportunity Credit, the Lifetime Learning...

Major US airlines drop Change Fees

Change Fees account for a respectable amount of income for the airlines. However these benefits seem to outweigh the more dire need to enticing passenger bookings. This large source of revenue has already been curtailed by American Airlines, United Airlines, Delta...

Reporting Phone Fraud

Reporting Phone Fraud and violations related to the FTC”s National Do Not Call Registry.

Tuition Free Schools

Free tuition does exist and may become more popular in the future. Of course these are few and far between and come with qualifications. The catch is that "free" doesn't equate to covering all educational expenses. But it's worth the look if you're in the hunt. The...

SiriusXM®

Reoccurring Subscriptions Reoccurring subscriptions can be sneaky ways for companies to continue siphoning your money when you no longer need the service. You most likely signed up for it but in reality you no longer use the subscription or you can get by with a lower...

DNA Testing

National DNA Day – April 25, 2020

Senior Advantage – another option to save money

Here's another on-line option for Seniors that provides various tools, coupons, discounts, and more to help you save money, stay informed and live a healthier life. "Senior Advantage customers get access to a deal portal, budgeting tool, 365-day personalized meal...

FLORIDIANS: High potential $ reward – low effort.

UNCLAIMED PROPERTY There's a 1 in 5 chance you have Unclaimed Property according to the Florida Dept. of Financial Services website, The state paid out $323,000,000 last year. It takes just a few minutes to search for yourself, a friend, or family member. This is too...

Downpayments

Tax Exemptions

Effective Complaining

Advertise your event here