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The down payment that you make when purchasing a house can have a drastic effect on a number of different aspects. One of the biggest things that it can impact is your mortgage rate. As a general rule, if you can come up with more money for a bigger down payment, you will essentially be able to save money on your mortgage rate. Here are a few things to consider about how your down payment affects your mortgage rate.
Limit Your Options
One of the biggest way that the amount of down payment that you have available can affect your mortgage rate is in limiting your options. There are many different lenders out there on the market and all of them have several different lending programs to choose from. Each one of these programs has special requirements that must be met by the borrower in order to qualify. If you do not meet the necessary qualifications, you will not be able to apply for this mortgage. This means that if you do not have a certain amount of money to use as a down payment, you will not even be able to apply for some of the best mortgages. Most of these mortgages have some of the lowest rates in the mortgage industry. This means that you will be missing out on these interest rates because you are eliminated before you can even apply.
Limits Negotiating Power
One powerful technique that you can use to secure a better interest rate is to negotiate with your lender. Once you find a mortgage lender, you may be able to negotiate with them in order to secure a lower mortgage rate. However, in order to negotiate with your lender, you are going to need some leverage on your side. If you have a large amount of cash on hand for a down payment, your lender will be more willing to negotiate with you. By comparison, if you have to rely on your lender to come up with all of the money for the purchase, you are going to be working on their terms. They will not be willing to negotiate nearly as much and they will expect you to comply with what they ask.
Sharing the Risk
The mortgage rate that you receive from your lender is a direct correlation to the amount of risk that the lender assesses. If they believe that you are a high risk borrower, they are going to charge a higher amount of interest to you. If they believe that you are a low risk borrower, you can save some money on your interest rate.
The amount of down payment that you have contributes to the amount of risk for the lender. The larger the down payment, the less risky the loan is for the mortgage lender. They know that they can foreclose on the property if you go into default and if the loan has a low loan to value ratio, they will easily be able to get their money back.
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