The Disadvantages of a Smaller Down Payment

While spending less might be ideal for most financial transactions, there can be downsides to offering a smaller down payment on a home. Before you decide how much money to pay upfront, it’s important to consider the long-term costs associated with a lower initial expense. Here are some disadvantages of smaller down payments to consider:

Losing Negotiation Power

A smaller down payment does not offer the same competitive edge that a larger one does. If you’re trying to buy a home in a seller’s market, your offer for a home might be up against many others. Another advantage you would miss is the negotiating power that comes with a larger down payment. By offering less money upfront, you give up leverage you could otherwise use for things like lowering purchase prices or closing costs.

You’ll Need Private Mortgage Insurance

If you opt for a smaller down payment, your lender will require private mortgage insurance (PMI). This is a monthly payment to the lender to protect them from the risk of default. While spending less upfront on your down payment, you may end up significantly increasing your ongoing monthly expenses.

Mortgage insurance can eventually be removed, but not all lenders have the same requirements. Consider your monthly expenses carefully and whether you can avoid adding to them with a larger down payment.

Interest Rates Will Be Higher

A smaller down payment will typically equal higher interest rates on your mortgage. While the percentages may seem small, just a single percent difference can cost you thousands of extra dollars over the lifetime of your loan.

Not only does the additional interest increase your ongoing expenses, it increases the time it takes to pay off your mortgage completely. If your goal is to pay off your loan early, a smaller down payment may pose a disadvantage.

While some aspects of home buying are the same for everyone, the financial choices are ultimately up to the individual. If you’re trying to decide whether it’s worth it to offer less upfront on a home, consider these disadvantages to make the best choice.