Maximizing opportunities is human nature. That is why many of us tend to borrow as much money as we are allowed to receive when buying a house. One school of thought says that having more funds is beneficial in a sense that it helps expand your property choices. However, it is not without drawbacks.
When shopping around for mortgage loans in Meridian, Deckers, Greenland and Dakan, fight the urge to borrow the most funds you can and choose to request for the money you just need instead. Below are the reasons why you are better off with a moderately sized loan amount.
A Smaller Down Payment
These days, you will be hard-pressed to find no-money-down mortgages. You will be asked to shoulder a portion of the price of the property to complete the purchase. In 2019, the average loan-to-value ratio in Colorado was 72%. In other words, the borrower has to pay the remaining 28% of the property cost up front.
The 28% of a house worth $220,000 is much less than the 28% of one with a price tag of $400,000, so avoid buying an oversized home to be able to put down a smaller down payment.
More Home Equity Outright
Home equity is the value of the property minus what is owed on it. If you pay 5% of the property price upfront, then you will have 5% equity on the house. The higher equity is better, for it is a form of wealth you can convert into cash later on and give you more financial flexibility in case you decide to put your property on the market someday.
Irrespective of down payment size, you stand to gain more home equity in the beginning if you borrow less money.
A Lower Interest Rate
Loaning a large sum is usually risky to any lender. If you want to negotiate for a lower interest rate, asking for less money can be a good strategy to convince your lender to give you a better deal.
A More Manageable Monthly Payment
A smaller loan amount naturally decreases the principal balance and may help reduce the interest. In the end, your monthly mortgage payments will likely be more manageable. Of course, you may still deal with high monthly payments if you opt for a short term.
But borrowing as little as possible can keep your mortgage bills to a minimum.
Less Costly House Maintenance
Realize that the cost of property maintenance is correlated to property size. Naturally, a house with fewer rooms and less square footage requires less improvement over time. If you want to minimize your long-term expenses without sacrificing the upkeep of your home, buy a small property.
Buying an oversized property is rarely practical and hard to justify if you are being honest with yourself. Borrowing less money enables you to free up more cash in your budget every month, which you could use elsewhere to build up a nest egg and prepare for your retirement.