Tempted to Make a Larger Home Down Payment? Here's Why You May Want to Rethink That

There was a time not so long ago when mortgages were fairly inexpensive. But today's mortgage rates look very different than the mortgage rates borrowers were seeing two or three years ago.

The average mortgage rate as of this writing is 6.96% for a 30-year loan, according to Freddie Mac. And so given where rates are today, you may be tempted to make a larger down payment on your home if you have the cash.

Doing so could lower your monthly payments on your mortgage and save you money on interest over time. But while increasing your down payment might seem like a good idea in theory, when you run the numbers, there may be a better option for your extra money.

Investing your money could make more sense

It made sense for buyers to make lower down payments on the homes they bought in 2020 and 2021, since money was so cheap to borrow. These days, that's not the case, seeing as how the average 30-year mortgage rate is roughly 7%. But while that is a lot of interest to pay on a home loan, you should know that over time, the stock market's return has been higher.

Over the past 50 years, the stock market has delivered an average annual return of 10% before inflation, as measured by the performance of the S&P 500. As such, while putting extra money into your home might save you from paying 7% on that sum, you could end up denying yourself the opportunity to earn 10% instead.

Let's say you buy a $300,000 home and put down 20%, or $60,000, on a 30-year fixed mortgage at 7%. Ultimately, you'll end up spending $334,590 on interest. If you put an extra $20,000 down when you make your home purchase, you'll cut your total interest to $306,711. That's a savings of $27,879.

But let's say you invest your extra $20,000 for 30 years at a 10% yearly return. At the end of that window, you'll end up with about $349,000, or $329,000 profit. So which would you rather do -- save about $28,000, or make almost $230,000?

Bigger isn't always better

Tempting as it may be to make a larger down payment on your home given today's mortgage rates, that's not necessarily the best choice. Plus, when you make a larger down payment, you tie up more money in your home.

Stocks are fairly easy to liquidate. If you buy stocks and need cash down the line, you can sell them pretty much on the spot.

But selling a home is a far more complicated process. And while you could always opt to sell off some of your stocks when a need for money arises, you can't exactly sell off a portion of your house to free up cash and keep the rest.

For these reasons, you may want to stick to a smaller down payment. It's best to put down 20% on your home to avoid having to pay for private mortgage insurance. But you may not want to push yourself to go beyond that.