The relationship between your down payment and the interest on your mortgage is relatively simple.
A down payment is a lump sum of money that amounts to a percentage of the total purchase price of the home you’re buying (generally between 5 to 25%).
The larger the down payment you make (up to twenty percent), the less you’ll owe on your loan and the less interest you’ll pay.
Let’s take a $500,000 home for example, and see the difference it makes to put a 5% down payment versus a 15% down payment on your mortgage once we include interest rates and mortgage insurance.
In this example, you opt for bi-weekly payments, a fixed rate of 4.39%, a 5-year term, and a 20-year amortization period.
Using this mortgage calculator, we compiled the following breakdown:
Over the 5 year term:
| 5% Down Payment ($25,000) | 15% Down Payment($75,000) | |
| Mortgage amount (loan + mortgage insurance) | $494,000 | $436,900 |
| Bi-weekly payment | $1,423.22 | $1,258.72 |
| Principal Paid | $86,566.10 | $76,560.19 |
| Interest Paid | $98,452.67 | $87,072.82 |
| Total paid: | $185,018.77 | $163,633.01 |
| Balance at the end of term: | $407,433.90 | $360,339.81 |
| % of principal paid | 17.52% | 17.52% |
Note that even though you’ve paid the same percentage of your principal, with the 5% down payment, your bi-weekly payments are higher, and at the end of the 5 year term, you will have paid over $11,000 more in interest than with the 15% down payment.
Over the 20-year amortization period:
| 5% Down Payment | 15% Down Payment | |
| Mortgage amount (loan + mortgage insurance) | $494,000 | $436,900 |
| Bi-weekly payment | $1,423.22 | $1,258.72 |
| Principal Paid | $494,000.00 | $436,900.00 |
| Interest Paid | $246,075.10 | $217,632.01 |
| Total paid: | $740,075.10 | $654,532.01 |
Over the life of your mortgage, you will have paid over $28,000 more in interest charges with the smaller down payment, and a total of $85,543.09 more to pay off your mortgage.
If you’d kept $50,000 in a savings account instead of putting it towards your down payment, you would have earned $3,618.86 in interest.
That means that after 20 years, you would have $53,618.86 in your savings account. We don’t have to think about it too long to know: if your mortgage is going to cost you $84,543 more with the smaller down payment, having $53,618 in the bank might not be the most financially sound choice. However, life is complicated, so it’s all about preference. Maybe you can find an investment that gives you a better return, or maybe, you want to have that money readily available, in case you need it. Either way, running the numbers can help you make a more informed decision.