Did you know? Homeowners are often able to put more money down when they buy their next home. Thatâs because, once they sell, they can use the equity they have in their current house toward their next down payment. And itâs why as home equity reaches a new height, the median down payment has too.
According to the latest data from Redfin, the typical down payment for U.S. homebuyers is $67,500âthatâs nearly 15% more than last year, and the highest on record (see graph below):
Hereâs why equity makes this possible. Over the past five years, home prices have increased significantly, which has led to a big boost in equity for current homeowners like you. When you sell your house and move, you can take the equity that gives you and apply it toward a larger down payment on your new home. Thatâs a major opportunity, especially if youâve had concerns about affordability.
Now, itâs important to remember you donât have to make a big down payment to buy your next homeâthere are loan programs that let you put as little as 3%, or even 0% down. But thereâs a reason so many current homeowners are opting to put more money down. Thatâs because it comes with some serious perks.
Why a Bigger Down Payment Can Be a Game Changer
1. Youâll Borrow Less and Save More in the Long Run
When you use your equity to make a bigger down payment on your next home, you wonât have to borrow as much. And the less you borrow, the less youâll pay in interest over the life of your loan. Thatâs money saved in your pocket for years to come.
2. You Could Get a Lower Mortgage Rate
Providing a larger down payment shows your lender youâre more financially stable and not a large credit risk. The more confident your lender is in your credit score and your ability to pay your loan, the lower the mortgage rate theyâll likely be willing to give you. And that amplifies your savings.
3. Your Monthly Payments Could Be Lower
A bigger down payment doesnât just help you reduce how much you have to borrowâit also means your monthly mortgage payment may be smaller. That can make your next home more affordable and give you a bit more breathing room 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), which is an added cost many buyers have to pay if their down payment isnât as large. Freddie Mac explains it like this:
âFor 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 homeownerâs insurance. Itâs a monthly fee, rolled into your mortgage payment, thatâs required if you make a down payment less than 20%.â
Avoiding PMI means youâll have one less expense to worry about each month, which is a nice bonus.
Bottom Line
Down payments are at a record high, largely because recent equity gains are putting homeowners in a position to put more money down.
If youâre thinking about selling your current house and moving, letâs work together to figure out how much home equity you have right now, and how it can boost your buying power in todayâs market.