Interest Rates and Down Payment
I often get asked, "Do I get a better interest rate if I put more money down?" First of all, it depends on credit scores. The higher the credit score, the better the interest rate. Let's assume a credit score of 760. (This is the best credit score bucket.) With a 5 – 19.99% down payment, the interest rates tend to be the same. If someone puts 20% down, the interest rate tends to be higher than if you put less down. HOW CAN THIS BE? The answer is easy. There is no mortgage insurance with a 20% down payment, so the investor has more risk than a loan with less down but has mortgage insurance. Therefore, the interest rate is higher with 20% down. The higher the risk, the more return the investor wants to have. This does change when 25% or more is placed as a down payment. The rate then drops to a rate as if there is less than 20% down. The moral of the story, if someone is going to make a large down payment, put 25% or more down to obtain a better interest rate.
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