Down Payment: How it Affects Your Mortgage Rate

A conceptual look at variable mortgage rates.When it comes to getting a mortgage, it is likely that you want to score the lowest potential rates. The good news is, this is possible when you are in a better financial position. This means having a high credit score, stable job, sizeable savings, and the absence of debt.

It is also important to note that your down payment can influence your rates. Paying more money down will enable to score low rates, which will also lower your monthly payment.

VIP Mortgage, a mortgage company in Tempe, share how your down payment influences your interest rates:

Negotiation position

A higher down payment puts you in a better negotiating position. When you’re willing to put down a large amount, your lender will also be prepared to offer you a low rate. If you, however, will depend on the mortgage company to come up with most of the money to finance your house, you will need to comply with their requirements. This may also mean higher interest rates.

Loan options

Certain types of loan programs have special requirements that you need to meet. Most of the mortgages with the lowest rates will require you pay a certain amount for down payment. If you can’t meet this amount, you can still get a mortgage but miss out on the best rates. It always makes sense to pay a big down payment for an increased chance of approval.

Borrowing risk

Mortgage lenders understand that borrowing money carries a risk. A higher down payment like 20% or more of the purchase price lowers the risk to the lender. A lower amount, on the other hand, carries a bigger risk, as it means borrowing more money. This is why they will charge you with a higher rate to share the risk. You may also need to pay private mortgage insurance (PMI), which protects the lender when you default on the loan.

You don’t necessarily need a big down payment to buy a house. In fact, some loan programs today will allow you to obtain a mortgage with little to no down payment. This, however, won’t let you get the best rates and have low monthly payments.