Do You Need a Large Down Payment to Get a Low Interest Rate?

When you’re buying a house and taking out a mortgage, you want to get a competitive interest rate. Making a substantial down payment can help you qualify for a low rate, but putting a large sum down isn’t possible for everyone.

Several other factors also influence the interest rate on a mortgage. If you can’t afford to make a sizable down payment, you might still be able to buy a house and get a loan with an attractive rate.

How Can You Get a Low Interest Rate?
The interest rate for a mortgage is based on how risky a lender perceives a borrower to be. If you put down a significant percentage of the purchase price, a lender will perceive you as less likely to default than someone with a smaller ownership stake in a property and will be likely to approve you for a loan with a competitive interest rate.

If you can’t afford to make a large down payment, you can focus on improving your credit scores. Reducing your credit card balances, limiting the percentage of available credit you’re using, and making payments on time can boost your credit scores and make you eligible for a lower interest rate.

Loans with shorter terms typically have lower interest rates. Taking out a mortgage with a shorter term can save you money in the long run, but you’ll have to make higher monthly payments than you would for a mortgage with a longer term since you’ll have fewer years to pay off the principal.

Should You Make a Large Down Payment?
Putting down a substantial sum of money isn’t necessarily required, but it has advantages. For one, it can help you qualify for a low interest rate, which can save you thousands of dollars over the term of the loan.

A large down payment can also save you money each month. You’ll borrow a smaller amount to buy a house, which means your principal balance will be smaller. You’ll also save money on interest charges since they’re directly related to the loan principal.

If you take out a conventional loan and put down less than 20% of the purchase price, you’ll have to get private mortgage insurance to protect the lender from a financial loss if you default on the loan. Those premiums might add up to thousands of dollars per year. If you put down 20% or more, you’ll be able to avoid PMI.

On the other hand, a large down payment can strain your budget. You’ll need to have money set aside to cover moving expenses, new furniture and appliances, maintenance and repairs.

How Can You Find a Loan With a Low Interest Rate?
Although lenders consider the same types of criteria when assessing mortgage applications, each company has its own way of determining interest rates. Shop around and get quotes from several lenders so you can find the best terms available.