The Benefits of Using Your Equity To Make a Bigger Down Payment

Did you know? Homeowners frequently have the opportunity to make a larger down payment when purchasing their next home. This is because, upon selling their current home, they can apply the equity they’ve built toward the down payment for their new property. As home equity continues to rise, we’re seeing the median down payment increase as well.

Recent data from Redfin shows that the average down payment for U.S. homebuyers is $67,500. This represents an increase of nearly 15% from last year and is the highest amount recorded to date (see graph below):

Here’s why equity plays a key role in this. In the past five years, home prices have risen substantially, resulting in significant equity gains for current homeowners. When you sell your home, you can use that equity to make a larger down payment on your new property. This presents a great opportunity, particularly if you’ve been worried about affordability.

It’s important to note that you don’t need to make a large down payment to buy your next home—there are loan programs available that allow you to put down as little as 3% or even 0%. However, many current homeowners are choosing to put down more, and there are good reasons for that. A larger down payment comes with significant benefits.

How a Bigger Down Payment Can Transform Your Homebuying Experience  

1. You’ll Borrow Less and Save More Over Time.

When you use your equity to make a larger down payment on your next home, you’ll need to borrow less. The less you borrow, the less interest you’ll pay over the life of your loan, which translates to significant savings in your pocket for years to come.

 

2. You May Qualify for a Lower Mortgage Rate.

Making a larger down payment demonstrates to your lender that you’re financially stable and less of a credit risk. When lenders have greater confidence in your credit score and repayment ability, they’re more likely to offer you a lower mortgage rate. This can significantly increase your savings.

 

3. Your Monthly Payments Could Be Lower.

A larger down payment not only reduces the amount you need to borrow, but it can also result in smaller monthly mortgage payments. This can make your next home more affordable and provide you with extra flexibility in your budget.

 

4. You Can Skip Private Mortgage Insurance (PMI)

If you can put down 20% or more, you can avoid Private Mortgage Insurance (PMI), an extra expense that many buyers face if their down payment is smaller. Freddie Mac describes it this way:

“For homeowners who put less than 20% down, Private Mortgage Insurance or PMI is an added insurance policy for homeowners that protects the lender if you are unable to pay your mortgage. It is not the same thing as homeowner’s insurance. It’s a monthly fee, rolled into your mortgage payment, that’s required if you make a down payment less than 20%.”

By avoiding PMI, you’ll eliminate one monthly expense, which is a great benefit.

 

Bottom Line

Down payments are at an all-time high, primarily due to recent equity gains that allow homeowners to contribute more.

If you’re considering selling your current home and relocating, let’s collaborate to assess your home equity and explore how it can enhance your buying power in today’s market.