Larger Down Payment Can Lower Mortgage Rates and Payments, Experts Say

Mortgage rates have held steady in the mid- to low-6% range for several months. Experts do not expect them to drop below 5% soon, though larger down payments can secure better loan terms and lower interest rates in some cases.

A bigger down payment cuts the loan amount and monthly payments. "A larger down payment can help lower monthly mortgage payments and reduce the total interest paid over time," said Chris Lim, president and chief growth officer at RE/MAX. "In today's market, it can help offset some of the affordability pressure created by higher borrowing costs."

For a $400,000 house, a $40,000 down payment on a $360,000 loan at 6% interest over 30 years means $2,158 monthly. A $60,000 down payment drops that to $2,038, a savings of more than $200 per month.

Larger down payments often qualify buyers for lower rates. "A larger down payment does help you get a lower interest rate, especially if the down payment is 25 to 40% vs. 20% down or less," said Scott Mosher, branch manager at Churchill Mortgage. "Typically, the rate savings run in the 0.25% range, so not overly significant, but every little bit helps."

Such payments can also cut or eliminate private mortgage insurance costs on conventional loans. Buyers pay $30 to $70 extra per month per $100,000 borrowed. Avoiding PMI saves $120 to $280 monthly on a $400,000 loan.

"You could also possibly get an appraisal waiver and save over $500 or more on costs," said Jeremy Schachter, branch manager at Fairway Independent Mortgage. "It's not always guaranteed, but on many conventional loans, if you put a larger down payment, you can possibly get a waiver from Fannie Mae or Freddie Mac on an appraisal and not need one."

Other benefits include more home equity for future borrowing and a stronger offer in competitive markets. "In a competitive situation, having a larger down payment will help you stand out," said Dana Bull, a real estate agent and advisor with Compass. "If a seller has two similar offers on the table, but one has a higher down payment, they will probably choose that one. The larger down payment shows they may have more of a cushion if repair issues present during an inspection or an appraisal comes in low."

Drawbacks exist. A large down payment drains cash reserves needed for emergencies or repairs. "The risk would be tying too much cash in the home and not leaving yourself a sufficient financial cushion," Lim said. "Homeownership can be unpredictable, so if you're making a large down payment, be sure you still have sufficient funds after closing to cover expenses like property taxes, insurance, and unexpected repairs."

It can also sideline other goals like retirement savings. "I always tell my clients not to look at their home purchase in a financial vacuum," Bull said. "How will this impact other major initiatives that they are saving for? Many of my younger buyers are also saving for a wedding or paying off student loans, so they may be inclined to take advantage of a low down payment."

Experts recommend keeping six months of expenses in an emergency fund. "It's highly recommended to have six months of expenses saved in an emergency fund at all times," Mosher said. "Borrowers who have limited assets should avoid making large down payments."

Alternatives include buying a cheaper home, comparing lenders, boosting credit scores or purchasing points, which cost about 1% of the loan amount as prepaid interest. "A larger down payment can help, but it's just one piece of the puzzle," Lim said. "Lenders also look closely at credit score, income, and debt-to-income ratio when determining rates. And for buyers who have the means, purchasing mortgage points can also lower your rate."