When it comes to fixed rate home loans, it’s obvious that the lower your interest rate, the better, but just how much of a difference can a quarter point make? How much long term savings can putting down an extra $25,000 mean? $50,000?
There are many factors involved with how much you can afford to put into your home. There might be a limit to what you can afford or you could need cash available for other investments. There might also be minimum requirements established by the lender that dictates how much you need to put down. This section examines the differences in monthly expense between various down payments and interest rates.
Let’s use an example of a $500,000 home with a 20%, or $100,000 down payment, which means a loan amount of $400,000. We’ll start with a 3.75% interest rate on a 30-year fixed rate loan.
| Beginning Balance | Interest | Principle | Total | Ending Balance | |
| Month 1 | $400,000.00 | $1,250.00 | $602.46 | $1,852.46 | $399,397.54 |
| Month 2 | $399,397.54 | $1,248.12 | $604.35 | $1,852.46 | $398,793.19 |
| Month 3 | $398,793.19 | $1,246.23 | $606.23 | $1,852.46 | $398,186.96 |
| Month 4 | $398,186.96 | $1,244.33 | $608.13 | $1,852.46 | $397,578.83 |
| Month 5 | $397,578.83 | $1,242.43 | $610.03 | $1,852.46 | $396,968.80 |
| Month 6 | $396,968.80 | $1,240.53 | $611.93 | $1,852.46 | $396,356.87 |
| Month 355 | $10,994.21 | $34.36 | $1,818.11 | $1,852.46 | $9,176.11 |
| Month 356 | $9,176.11 | $28.68 | $1,823.79 | $1,852.46 | $7,352.32 |
| Month 357 | $7,352.32 | $22.98 | $1,829.49 | $1,852.46 | $5,522.83 |
| Month 358 | $5,522.83 | $17.26 | $1,835.20 | $1,852.46 | $3,687.63 |
| Month 359 | $3,687.63 | $11.52 | $1,840.94 | $1,852.46 | $1,846.69 |
| Month 360 | $1,846.69 | $5.77 | $1,846.69 | $1,852.46 | $0.00 |
Notice the difference in the amount of interest versus principal paid during the first six months than the final six months, Month 354 through Month 360. During the beginning of a loan, the borrower pays back mostly interest. Over the lifetime of a 30-year loan, the borrower would have paid a total of $666,886.45 for a $400,000 loan at 3.75%.
At 3.75%, how much difference would putting down an extra $25,000 make? Your loan amount would decrease to $375,000 and the additional down payment decreases your monthly payment by $110.01 to $1,736.68. Over the lifetime of the loan, you would pay $16,660.40 less in interest by borrowing $25,000 less.
At the same interest rate, how much difference would putting down an extra $50,000 make? Your loan amount would decrease to $350,000 and the additional down payment decreases your monthly payment by $231.55 to $1,620.90. Over the lifetime of the loan, you would pay $33,340.80 less in interest by borrowing $50,000 less.
What if the borrower was only able to obtain a 4% rate and put down $100,000? The 1/4 point only adds about $57.21 a month to the mortgage payment, but that totals $20,611.58 in interest over the lifetime of the loan.
Whether or not these differences in lifetime payout will affect you adversely depends mostly on how long you plan on keeping the property. Talk to a loan officer about what type of loan is right for you.
Does it even matter how much you pay in interest over the lifetime of the loan?
In the above example, we showed you the difference that 1/4 point and $25k/$50k can make over the lifetime of a loan, but does the difference matter for your particular objectives?
For example, if you only plan on holding the property for a few years, the difference in monthly payment may not affect your bottom line. You may benefit from putting less down and having more cash on hand, which you can put into other investments. Interest rates are so low right now especially that it’s not difficult to earn more from your cash than you’re spending in interest by leveraging a larger amount.
Even if you don’t have plans to invest the cash elsewhere, you may personally benefit from the liquidity. If a larger down payment prevents you from having a proper reserve left over to handle vacancies, unexpected expenses, or deferred maintenance expenses on your property, you may want less money down so that you can keep more cash on hand to cover those things.
On the flipside of the coin, it’s oftentimes not a good idea to be overleveraged. Higher monthly payments on properties cost you more money during periods of vacancy or periods when rental markets dry up. If you’re overleveraged, you may not be bringing in enough in rental income to cover your expenses, and you’ve got to be able to weather the storm. Whereas having more money in a property would allow it to stand on its own two legs. Meaning, the cash flow generated from the property can cover all expenses and periods of vacancy.
Everyone’s financial situation, objectives, and level of risk tolerance is unique, and there’s no single answer that is right for everyone. Consider your individual objectives, financial situation, and worst case scenarios when deciding how much is right for you to put down.