Friday, October 25, 2024 / by Dick Keenan
Why Leveraging Your Equity for a Larger Down Payment Is a Smart Move
Many homeowners can make a larger down payment on their next home by using the equity they've built in their current property. With rising home prices over the last several years, homeowner equity has surged, helping drive the typical down payment higher than ever. According to recent data from Redfin, the average U.S. down payment has climbed to $67,500—almost 15% more than a year ago and the highest recorded (see graph below).
Why Equity Makes a Bigger Down Payment Possible
As property values have grown, so has the equity that homeowners, like you, can tap into. When you sell, you can apply this equity directly to your next home’s down payment, giving you a stronger financial foothold, especially if affordability is a concern.
Of course, a large down payment isn’t required—many loans allow for as little as 3% or even 0% down. But with equity in hand, many homeowners choose to increase their down payment because it offers key advantages.
Advantages of a Larger Down Payment
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Lower Borrowing Costs Using equity for a bigger down payment means borrowing less, reducing the total interest you’ll pay over the life of your loan. This results in long-term savings.
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Potential for a Lower Interest Rate A larger down payment reassures lenders of your financial stability, possibly qualifying you for a better mortgage rate, which enhances your savings.
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Reduced Monthly Payments By lowering the amount you borrow, your monthly mortgage payment will likely decrease, making your new home more affordable and giving you extra room in your budget.
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Option to Avoid Private Mortgage Insurance (PMI) If your down payment is 20% or more, you can skip PMI, an added monthly fee required when your down payment is less than 20%. As Freddie Mac explains, PMI protects the lender, not the homeowner, so avoiding this cost is a significant perk.
Bottom Line
Record-high down payments are largely due to increased homeowner equity. If you’re ready to sell your current home and move, let’s evaluate your equity and see how it can give you a boost in today’s market.