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When buying a home, we typically pay part of the price with our own money and borrow the remainder. The part we pay with our own funds is called the down payment.

If you're borrowing money for your home purchase from a bank or mortgage lender, they have requirements dictating what percentage of the purchase price you must pay out of your own pocket. The percentages range from a high of 20% to a low of 0%.

In general, lenders like to see you put some of your own hard-earned money into the property so that you'll be less likely to decide someday you don't want the house anymore and just walk away from it.

With your own money in the deal, you'd lose your investment by walking away and letting it go back to the bank. They figure with a sizable chunk of your own money at stake, you'll work harder to keep up your loan payments so you don't lose your investment.

In recent years, however, many lenders were more interested in putting new loans on their books and lowered the down payment requirements, even to as low as 0%. Some of those loans are coming back to haunt those aggressive lenders as more people with little invested have been willing to give their homes back to the lender when times got tough.

The lender's down payment requirements, however, are minimums. They have no problem with you making a higher down payment if you so choose.

While many people take advantage of low or no down payment terms to be able to buy a house they might not otherwise be able to afford, there can be advantages to plopping down more than the minimum when you buy.

1. Lower interest rate.

The less of your money you put in, the greater the risk to the lender that you might someday walk away from the house. They compensate for that risk by charging you a higher interest rate, or requiring you carry mortgage insurance, which adds 1/2 % to your effective rate.

By paying a larger down payment, lenders consider you less of a risk, and can offer you better interest terms, which means less expense to you and lower monthly payments.

2. Lower monthly payments.

Besides the monthly payment savings of a lower interest rate, your monthly payment is also lowered because you're borrowing less money. If you have a little bit of extra cash to use as a down payment, you can lower your monthly payments, or get into a more expensive home without increasing your monthly payments.

3. Return on investment.

The extra down payment you put into a home is equivalent to putting the same money into a savings account at an interest rate equal to your mortgage loan interest rate. Using the extra down payment to decrease the size of your loan saves you the same amount of money as you'd earn on the money in a savings account at the same rate.

There is also an added return on your investment as the house increases in value. If your home's value increases by 4% per year, your down payment is earning an additional 4% on top of the interest rate savings. With a 6% mortgage, your down payment could be earning 10%, a rate that could be hard to beat with other similarly secure investments.

Put Down as Much as You Can Afford

The bottom line here is that you shouldn't just put down the minimum payment your lender requires. Rather, you should pay as much of a down payment as you can comfortably afford. The money you save and the money you earn on the additional investment can make it smart money management.

Learn more about this author, Steve Holder.
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