Low down payment, higher costs

Paying the mortgage for the primary residence
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A lower down payment will mean higher mortgage payments.

Make a lower down payment, and you'll face higher monthly mortgage payments.

How come? Several reasons. The first is just simple math: If you put up less money now toward the price of the house, you'll need to borrow more and will have more of the cost to pay off.

Next, loans with lower down payments usually come with higher interest rates.

Finally, a big reason is something that's often dreaded called private mortgage insurance, or PMI. 

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Benefits of a 20% down payment 

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Determine whether you can afford to make a larger down payment.

Lenders love it when you can make a 20% down payment, because that makes the mortgage a good risk. The lender believes it would have no trouble recouping the other 80% if you were ever to default on the loan and fall into foreclosure. 

Calculate what your monthly mortgage payment would be with a 20% down payment, to see if you could afford it.

If you don't want to put that much money down, understand that the lender will make you buy PMI. It's insurance that pays off the loan if you ever stop paying. PMI can be expensive, and the premiums are tacked onto your mortgage payments. 

Some types of mortgages — including VA loans — allow for low down payments with no PMI.

Risks of a higher down payment

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A higher down payment will tie up a lot of money in your house.

But making a larger down payment isn't necessarily the smartest choice. 

A big chunk of money will be tied up in your home. You won't have an easy way of getting at that money if you're suddenly slapped in the face with a major unexpected expense and don't have an emergency fund to deal with it. 

When you make a hefty down payment, there's also a chance you could lose that money completely.

If you're ever foreclosed on, the down payment will never be returned. Or, if you have to sell the home for less than you paid, you might not recover your down payment.

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What should you do?

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Weigh the pluses and minuses before making your decision.

Personal finance is just that: personal. There is no right or wrong answer to how much of a down payment should be made.

You have to weigh all the pros and cons and decide what would work best for you. A trusted financial adviser might help you make your choice.

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About the Author

Doug Whiteman

Doug Whiteman

Former Editor-in-Chief

Doug Whiteman was formerly the editor-in-chief of MoneyWise. He has been quoted by The Wall Street Journal, USA Today and CNBC.com and has been interviewed on Fox Business, CBS Radio and the syndicated TV show "First Business."

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