Down Payment, The Great Mortgage Equalizer

[Dax Nollenberger]

Interest rates have had a substantial impact on the overall affordability of a home. With mortgage rates on the continual rise, it’s time to think creatively about how we can minimize our long-term costs and make our homes more affordable in the short term. Did you know that a 1% interest increase adds a little over $600 a month in cost on a $1M loan?

I know leverage is ideal when it comes to Real Estate investing but in times like these, creativity wins the day. 

From a lender’s perspective, there are a variety of ways to lower the impact of mortgage rates like rate buydown and Adjustable-Rate Mortgages (ARMs). I’d advise speaking to a lender about the best options for you.

Ever heard the phrase “marry the home, date the rate”? This is a common Realtor phrase to help buyers understand that rates have the option of being temporary. The benefit of a fixed-rate mortgage is you lock in a rate so if it goes up, you maintain the lower rate, and if it goes down, you can simply refinance.

Long-term, refinance is a great solution for the temporary issue of higher rates. However, it doesn’t really help you now. So, what can you do to lower the impact of higher rates right now?

The quick and easy solution is to increase your down payment.

To understand the impact of increasing your down payment, let’s look at dueling scenarios:

20% Down Scenario

Using a 30-year fixed mortgage at 6.5%

Purchase Price: $1.2M

Down Payment: $240k

Mortgage Amount: $960k

Monthly Payment: $6,067.85

25% Down Scenario

Using a 30-year fixed mortgage at 6.5%

Purchase Price: $1.2M

Down Payment: $300k

Mortgage Amount: $900k

Monthly Payment: $5,688.61

The difference is straightforward, pay the extra $60k and reduce your monthly payment by $379. While impactful, that by itself might not seem worth the additional investment. Let’s zoom out for perspective.

Your additional $60k investment is yielding a return every year. After 13 years you’ll have earned your $60k back. I’m sure some of our investment-savvy readers will ask the question, “what about the opportunity cost of not having that money? You could invest it elsewhere.” You’d be right, there is an opportunity cost as there is with not increasing your down payment. The opportunity cost of that is not saving the additional cash each month to invest how you chose. The Average Annual Return for that down payment investment is 7.58%!

But wait, it gets better! You still have the refinance option in your back pocket.

The moral of the story is that paying a higher down payment is a great way to lower your loan exposure and save money. You’ll receive a significant return on your investment while also maintaining the opportunity to refinance down the line.

The higher the interest rate, the larger the return on your increased down payment investment.

This means that you can purchase a home at a more affordable price than when the market was peaking (but interest rates were low) and use that additional cash to increase your down payment therefore lowering your monthly payment (and interest cost) on the loan. When you factor in those strategies, it may just be a better time to buy than when prices were high and rates were low. 

If you can navigate these uncertain times with creative tricks and realize that these interest rates are a temporary hurdle that you can overcome, opportunities for deals are out there.

Reach out so I can talk through how an increased down payment can help you achieve your real estate goals. Thanks for reading!