What is the Right Mortgage Down Payment?

Low mortgage down payments are a mixed blessing for borrowers. The smaller the down payment, the greater the monthly payment, interest expense, and private mortgage insurance (PMI).

In many cases, the lender will require a minimum down payment - say 5 or 10 percent. Perhaps, you can afford to make a larger down payment. Should you? This case study will show you how to weigh the pros and cons of increasing the down payment on your mortgage.

Mortgage Down Payment Questions

When a borrower decides whether to make a big or a small down payment on a mortgage, he/she should consider three key questions:

What is the minimum down payment required by my lender? The lender may require zero down payment, 5 percent, 10 percent, or more.
What is the maximum down payment that I can afford? This depends on your personal finances. Keep some funds for daily expenses, other investments, emergencies, etc.
How much will I save? Compare the financial impacts of making a minimum down payment with making a maximum down payment.

Use this site's mortgage calculator to assess the financial impacts of making a minimum or a maximum down payment. The following case study illustrates the process.

Minimum Versus Maximum Down Payment

Judy is buying a new home for $400,000. The lender requires a minimum down payment of 10 percent (i.e., $40,000). Based on her personal finances, Judy can afford a maximum down payment of $80,000. She decides to test both options. The details of each mortgage appear below.

Minimum Down Payment		Maximum Down Payment
Mortgage type:	Fixed-rate mortgage	Mortgage type:	Fixed-rate mortgage
Loan term:	30 years	Loan term:	30 years
Loan amount:	$360,000	Loan amount:	$320,000
Interest rate:	7 percent	Interest rate:	7 percent
Down payment:	$40,000	Down payment:	$80,000
Points:	0	Points:	0
Other costs:	$0	Other costs:	$0

Additionally, the lender requires private mortgage insurance (PMI) payments of $2400 per year, until the principal owed is less than 80% of the fair market value of the home. Here, the fair market value is equal to the sale price - $400,000.

To compare the options, Judy uses the Mortgage Mavin mortgage calculator. The first step is to describe the analysis.

Choose "Compare two mortgages" from the Main Goal dropdown box of the calculator.
Be sure the "Show amortization schedule" checkbox is checked.
Be sure the "Include mortgage insurance" checkbox is checked.
Under Loan 1, choose "Fixed-Rate Mortgage" as the mortgage type.
Under Loan 2, choose "Fixed-Rate Mortgage" as the mortgage type.

The calculator then displays text boxes to accept the data it needs, and Judy enters data from the above description into the text boxes. The calculator settings and data entries are shown below.

Describe the Analysis

Main goal:

Options:

Show amortization schedule
Include mortgage insurance
Include hazard insurance

Include property tax
Include prepayments
Include tax deductions

Describe the Loan

Loan 1

Loan 2

Mortgage type:

Loan term (in years):

Loan amount ($):

Interest rate:

Describe the Costs Paid at Closing

Down payment ($):

Points (%):

Other costs and fees ($):

Enter Insurance Info

Annual mortgage insurance ($):

Appraised value of home ($):

After Judy clicks the Calculate button, the calculator produces a summary report that includes the following results.

Mortgage Attributes	Minimum Down Payment	Maximum Down Payment
Loan duration	30 years	30 years
Principal paid	$360,000	$320,000
Total interest expense	$502,222.63	$446,418.10
Down payment	$40,000	$80,000
Private mortgage insurance (PMI)	$20,200	$0
Total mortgage cost	922,422.63	846,418.10
Savings	. . .	$76,004.53

The summary report shows that a down payment of $80,000 will reduce the total mortgage cost by $76,004.53, compared to a down payment of $40,000.

It is important to note that the above savings occur over the full term of the mortgage - 30 years. To determine the savings over a shorter time period, Judy can refer to the amortization schedule, which is also produced as an output of the calculator. The amortization schedule shows month-by-month mortgage costs for the minimum and maximum down payment. For example, at the end of 10 years, the maximum down payment would save $46,259; and at the end of 20 years, it would save $66,787.

Conclusion

This kind of analysis allows a borrower to assess the financial impacts of different down payments. In this case, for example, Judy might conclude that the savings ($76,004.53 over the life of the mortgage) are big enough to justify making a maximum down payment. Or she might conclude that she would do better to invest that money in the stock market. In either case, she would be making an informed choice, based on a clear understanding of the financial pros and cons.