Are There Any Downsides To Saving For A Larger Down Payment?

11 July 2023
 Categories: Finance & Money, Blog

Saving for a larger down payment is one of the most common suggestions for home buyers. However, it stands to reason that it has downsides. After all, it's rare for people to pay everything upfront. Instead, it's normal to use mortgage services, which wouldn't be the case if saving for a larger down payment had no downsides. As a result, you should carefully consider the downsides of saving for a larger down payment if you want to buy a home.

You'll Have to Wait to Buy

First, you'll need to wait to enter the real estate market if you're saving for a larger down payment. This can be a good thing. For instance, home prices might have peaked, meaning they're expected to fall in the future. Thanks to this, you can gain more value from each dollar you spend. Unfortunately, there is no guaranteed way to capitalize on such fortuitous timing. If anything, Investopedia points out that home prices tend to go up over time, meaning it's risky to bet on these outcomes.

You Might Have to Choose Between Financial Goals

Second, you'll need to dedicate a sizable portion of your discretionary income if you want to finish saving for a larger down payment soon. Missing out on some luxuries won't be too bad. The issue is that you might have to choose between your financial goals. You might think you'll be fine prioritizing saving for a larger down payment over retirement because you can make it up in the future. The Motley Fool reminds people that it's best to start saving for retirement early because compound interest is incredible when it has time to work. You can make up for starting late by putting in more money. Sadly, you can't guarantee you'll be able to do so because you'll always have more needs and wants than your budget can accommodate. On top of this, you should have an emergency fund saved up before you buy a home. This will help you pay your mortgage to the end by ensuring you're covered should something unexpected happen.

You Benefit Most When You Stay for a Long Time

Third, a larger down payment provides the most savings for those planning to stay in place. This is because the benefits of a larger down payment accumulate over time, meaning they're most noticeable when you let a mortgage play out rather than pay it prematurely. You'll still benefit if you sell the home before moving on after a short time. However, you won't save as much as you would have if you remained in place for the long run. This means there might not be much point in saving for a larger down payment if you don't intend to settle in.

Always Calculate the Numbers

You'll have an easier time deciding the right down payment size once you've calculated the numbers for the different options before comparing them. Doing so will be laborious and time-consuming. Even so, it's worthwhile because numbers will give you something solid to base your decision-making on. Mortgage services can give you a clearer understanding of your options before helping you make sense of the numbers for each. As such, consulting them can be invaluable.

If you need information about mortgages, reach out to a business like Great Lakes Credit Union.