The Benefits of Using Your Equity To Make a Bigger Down Payment

Did you know? Homeowners are often able to put more money down when they buy their next home. Thats because, once they sell, they can use the equity they have in their current house toward their next down payment. And its why as home equity reaches a new height, the median down payment has too.

According to the latest data from Redfin, the typical down payment for U.S. homebuyers is $67,500thats nearly 15% more than last year, and the highest on record (see graph below):

Heres why equity makes this possible. Over the past five years, home prices have increased significantly, which has led to a big boost in equity for current homeowners like you. When you sell your house and move, you can take the equity that gives you and apply it toward a larger down payment on your new home. Thats a major opportunity, especially if youve had concerns about affordability.

Now, its important to remember you dont have to make a big down payment to buy your next homethere are loan programs that let you put as little as 3%, or even 0% down. But theres a reason so many current homeowners are opting to put more money down. Thats because it comes with some serious perks.

Why a Bigger Down Payment Can Be a Game Changer

1. Youll Borrow Less and Save More in the Long Run

When you use your equity to make a bigger down payment on your next home, you wont have to borrow as much. And the less you borrow, the less youll pay in interest over the life of your loan. Thats money saved in your pocket for years to come.

2. You Could Get a Lower Mortgage Rate

Providing a larger down payment shows your lender youre more financially stable and not a large credit risk. The more confident your lender is in your mortgage="">mortgage-refinancing-impact-on-credit-score'>credit score and your ability to pay your loan, the lower the mortgage rate theyll likely be willing to give you. And that amplifies your savings.

3. Your Monthly Payments Could Be Lower

A bigger down payment doesnt just help you reduce how much you have to borrowit also means your monthly mortgage payment may be smaller. That can make your next home more affordable and give you a bit more breathing room in your budget.

4. You Can Skip Private Mortgage Insurance (PMI)

If you can put down 20% or more, you can avoid Private Mortgage Insurance (PMI), which is an added cost many buyers have to pay if their down payment isnt as large. Freddie Mac explains it like this:

For homeowners who put less than 20% down, Private Mortgage Insurance or PMI is an added insurance policy for homeowners that protects the lender if you are unable to pay your mortgage. It is not the same thing as homeowner's insurance. It's a monthly fee, rolled into your mortgage payment, thats required if you make a down payment less than 20%.

Avoiding PMI means youll have one less expense to worry about each month, which is a nice bonus.

Bottom Line

Down payments are at a record high, largely because recent equity gains are putting homeowners in a position to put more money down.

If youre thinking about selling your current house and moving, reach out to a trusted real estate agent. Theyll help you figure out how much home equity you have right now, and how it can boost your buying power in todays market.