Is a larger down payment worth it in today's mortgage rate environment? What experts say

While it's relatively common for mortgage rates to change, at least marginally, on a regular basis, overall, mortgage rates have been hovering in the mid- to low-6% range for several months now. And, while borrowers may be hoping for the rate landscape to ease, increasing affordability for homebuyers, most experts don't expect them to fall below 5% anytime soon. 

That doesn't mean getting a lower mortgage rate is impossible, though. In some cases, making a larger down payment on a home can qualify you for better loan terms than you'd otherwise get — and that can ultimately mean a lower interest rate, too. But there are tradeoffs, of course, and making a larger down payment generally isn't the right move for everyone. 

So how do you know when it could be worth doing so, especially in today's landscape? Here's what experts say about making a big down payment in today's market — and when you might want to consider it yourself. 

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Is a larger down payment worth it in today's mortgage rate environment? 

When you make a larger down payment on your home, that down payment reduces how much you have to borrow, and subsequently impacts your monthly mortgage loan payments. 

"A larger down payment can help lower monthly mortgage payments and reduce the total interest paid over time," says Chris Lim, president and chief growth officer at RE/MAX. "In today's market, it can help offset some of the affordability pressure created by higher borrowing costs."

For example, let's say you're buying a $400,000 house. In this scenario, you put down $40,000 and borrow the remaining $360,000 necessary to purchase the house. With a 6% interest rate on a 30-year mortgage loan, that would equate to a payment of $2,158 per month. But if you were to put $60,000 down instead, your payment would drop to $2,038 — saving you over $200 per month.

But there's more. In many cases, a larger home down payment can also help you qualify for a lower interest rate. This can reduce your monthly mortgage payment and your long-term costs even more. 

"A larger down payment does help you get a lower interest rate, especially if the down payment is 25 to 40% vs. 20% down or less," says Scott Mosher, branch manager at Churchill Mortgage. "Typically, the rate savings run in the 0.25% range, so not overly significant, but every little bit helps."

Experts say a big down payment can also reduce your private mortgage insurance (PMI) costs or even help you avoid it altogether, especially if you're taking out a conventional loan. On conventional loans, you'll usually pay between $30 and $70 extra per month in private mortgage insurance for every $100,000 you borrow. When calculating with these numbers, avoiding PMI could save you anywhere from $120 to $280 per month on a $400,000 loan.

"You could also possibly get an appraisal waiver and save over $500 or more on costs," says Jeremy Schachter, branch manager at Fairway Independent Mortgage. "It's not always guaranteed, but on many conventional loans, if you put a larger down payment, you can possibly get a waiver from Fannie Mae or Freddie Mac on an appraisal and not need one."

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Benefits and drawbacks of making a larger down payment

In addition to the savings a large down payment can offer, there are other perks, too. For one, it gives you more equity in the home, which you can borrow from if needed down the line. And, it can also make you a more competitive homebuyer while you hunt for a house.

"In a competitive situation, having a larger down payment will help you stand out," says Dana Bull, a real estate agent and advisor with Compass. "If a seller has two similar offers on the table, but one has a higher down payment, they will probably choose that one. The larger down payment shows they may have more of a cushion if repair issues present during an inspection or an appraisal comes in low."

Despite the possible perks, though, a hefty down payment isn't always the answer. One notable drawback to making a larger down payment is that it depletes the cash you have on hand for other purposes. That might mean less in savings for an emergency, or it may make it hard to cover a potential home repair down the road. 

"The risk would be tying too much cash in the home and not leaving yourself a sufficient financial cushion," Lim says. "Homeownership can be unpredictable, so if you're making a large down payment, be sure you still have sufficient funds after closing to cover expenses like property taxes, insurance, and unexpected repairs."

Prioritizing a big down payment may also throw off other financial goals you might be trying to achieve. For example, if you're saving for retirement, your funds may be better put toward an investment portfolio, where you can grow them more significantly over time.

"I always tell my clients not to look at their home purchase in a financial vacuum," Bull says. "How will this impact other major initiatives that they are saving for? Many of my younger buyers are also saving for a wedding or paying off student loans, so they may be inclined to take advantage of a low down payment."

The bottom line

Making a big down payment definitely has advantages, and it has the potential to save you quite a bit, both monthly and in the long run. But experts say it's only the right move if you can leave enough in savings to handle an emergency and continue working toward any other financial goals you might be aiming for. 

"It's highly recommended to have six months of expenses saved in an emergency fund at all times," Mosher says. "Borrowers who have limited assets should avoid making large down payments."

Instead, explore other ways to reduce your payment or get a lower mortgage rate. This might include buying a lower-priced home, shopping around for your lender, improving your credit score, or buying points.

"A larger down payment can help, but it's just one piece of the puzzle," Lim says. "Lenders also look closely at credit score, income, and debt-to-income ratio when determining rates. And for buyers who have the means, purchasing mortgage points — essentially prepaid interest that costs about 1% of the loan amount can also lower your rate."