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A larger down payment (typically 20% or more) significantly increases your negotiating power. It reduces the lender’s risk, makes you a more attractive borrower, and often qualifies you for better rates and terms. It also helps you avoid private mortgage insurance (PMI), which is an additional cost.
Closing Delays: The home buying process is time-sensitive. Starting over can add 2-4 weeks, potentially causing you to miss your closing date and breach the contract.
Losing Your Earnest Money Deposit: If the delay causes you to fail to close on time, the seller could be entitled to keep your deposit.
Additional Costs: You will likely have to pay for a new appraisal and may lose application fees paid to the first lender.
Straining Seller Relations: The seller may become anxious and less willing to negotiate if issues arise.
This is a classic financial dilemma. Paying down your mortgage offers a guaranteed, risk-free return equal to your mortgage interest rate. Investing offers the potential for a higher return but comes with market risk. A common approach is to split extra funds between the two, or to focus on the mortgage if you are risk-averse and value peace of mind.
You should actively pursue removing PMI when your loan-to-value (LTV) ratio reaches 80% (meaning you have 20% equity) based on your original purchase price and payments. You can often request its cancellation at this point. By law, for most loans, the servicer must automatically terminate PMI once you reach 22% equity based on the original amortization schedule. If your home’s value has increased, you may be able to remove it sooner with a new appraisal.
