How Your Down Payment Impacts Your Home Loan Interest Rate

You’ve spent the last few months paying down your debt and improving your credit. You have a stable job and a steady source of income. As far as your finances go, things look good, and you feel like you’re ready to apply for a home loan. But wait, have you saved money for a down payment?

Your down payment affects more than your home loan eligibility. It also plays a critical role in determining your mortgage rate. Here’s how it works.

How Your Down Payment Affects Your Home Loan Rate

Your credit score isn’t the only factor that determines your home loan interest rate. How much money you put down also plays a big role.

This is important because your interest rate affects how much money you pay over the life of your loan. Even a 1% difference in your mortgage rate can impact your finances substantially and potentially save you thousands of dollars.

Here are some of the ways that your down payment can impact your mortgage rate:

Determines Your Level of Risk

Mortgage rates are determined not only by market activity, but also by a borrower’s level of risk. Borrowers who put down a larger down payment are seen as less risky to lenders because it looks like they have more skin in the game. The more cash you put down, the more you have at stake. Therefore, lenders prefer borrowers who put more money down and are more likely to offer them better loan terms.

Affects Your Loan to Value (LTV) Ratio

Another reason your down payment amount is important; is that it affects your loan-to-value ratio. Your loan-to-value (LTV) ratio is the amount of your loan compared to the value of the property you’re purchasing. A higher LTV ratio can result in a higher interest rate, while a lower LTV ratio can result in a lower interest rate.

Could Compensate for Weaknesses

A higher down payment could make up for other weaknesses in your application. For example, a lender may be more willing to accept an applicant with bad credit if they put down a large sum of cash. The same could be said about a borrower with a high debt-to-income ratio or gaps in their employment history. The more money you put down, the more secure the transaction is for your lender.

Impacts Your Monthly Mortgage Payments

In addition to affecting your home loan rate, your down payment amount can also affect your monthly payments. The less money you borrow, the less you have to pay back. Additionally, a lower interest rate could also result in a more affordable monthly payment.