We often have borrowers who want to put as much down as humanly possible – to minimize their housing payment.
But – we often talk them out of it for a variety of reasons that are set out below.
#1 – Pay Off Consumer Debt.
When buyers have a lot of consumer debt, we always encourage them to make smaller down payments and then use the remaining cash to pay off consumer debt. The monthly savings from paying off consumer debt almost always far exceed the potential savings from having a smaller mortgage. In addition, mortgage interest rates tend to be much lower than consumer debt interest rates and most mortgage interest is tax-deductible, while consumer debt interest is not.
#2 – Save Cash for the New Home Expenses.
Many buyers vastly underestimate the amount of cash they will need for unanticipated expenses once they buy a home, especially if they have been renting. These costs include moving costs, new furniture needs, new appliances, minor home improvements of all types (window treatments, floor coverings, etc.), higher utility bills, and higher yard and home maintenance costs.
#3 – Save Cash for Rainy Days.
Rainy days of course include job losses, unexpected medical bills, repairs and much else. Younger borrowers sometimes forget that “rainy days” afflict us all.
#4. Save Cash (“Dry Powder”) for Opportunities.
I have published this blog numerous times over the years, but I am adding this item for the first time. I recently wrote a blog about assets crashing, and I quoted Andy Kessler (from the WSJ) talking about “The Big Puke” or the point when stocks really take a dive and we know they have hit bottom. And that is when we want to have dry powder to look for opportunities – like the people who bought condos in 2011 for $50,000 that are now worth $600,000.
#5 – Take Advantage of Low Rates.
When rates are extremely low (under 4%), borrowing is darn near free – so why not borrow more and invest the savings?
FINAL POINT: Yes, as a mortgage lender, we tend to make more money off of larger loans. But the difference is marginal, and I can assure readers that the purpose of this blog is not to encourage more borrowing for our benefit. 😊 The above reasons are all legitimate and based on my observations over the last 30 years.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167