Should Denver Homebuyers Pay Off Debt or Save for a Larger Down Payment?
When Denver homebuyers face the choice to pay off debt or save for a larger down payment, the decision comes down to balancing short-term financial flexibility and long-term mortgage savings. Here’s what you need to consider, using a clear example.
The Scenario
Imagine you have the $30,000 in savings. And you also have consumer debts you would love to pay off before you buy a home. Should you pay off existing debt or use it for a bigger down payment?
- Option 1: Pay off debt, reducing monthly expenses.
- Option 2: Keep debt and use the money for a larger down payment.
Choosing the second option could mean a higher mortgage payment, around $200 extra each month, due to a smaller down payment. This is something that Ray Williams at Mortgage Maestro Group went through personally when he bought his first home. With careful consideration the right financial decision can be made to accomplish both goals.
Factors to Consider
1. Long-term Mortgage Savings
A larger down payment significantly reduces your mortgage balance, lowering overall interest. Here’s an example of how:
| Down Payment | Loan Amount | Rate (Est.) | Monthly Payment | Total Interest (30 yrs) |
|---|---|---|---|---|
| 10% | $495,000 | 6.5% | $3,129 | $631,000 |
| 20% | $440,000 | 6.0% | $2,638 | $509,000 |
Source: Mortgage Maestro Mortgage Calculator
A larger upfront investment can save over $120,000 in interest and significantly reduce monthly payments. Denver continues to be a competitive housing market. Even with rates higher we are seeing the average days on market at 45 , to sell. With many people relocating from Los Angeles or San Francisco to Denver so they can buy a home.
2. Debt-to-Income (DTI) Ratio
Paying off debt lowers your DTI ratio, improving your chances for better loan approvals and rates. Lenders prefer a DTI below 45%. You may also want to learn about the differences between Conventional and FHA loans to decide which is right for you. Check out this video to learn more:
3. Interest Savings and Flexibility
High-interest debt like credit cards often far exceeds mortgage interest rates, making paying off these debts first more beneficial financially.
Real-World Example
If you use $30,000 to pay down high-interest debt instead of a larger down payment:
- You’ll lower monthly debt payments significantly.
- You’ll enhance your financial flexibility, potentially qualifying for a better mortgage rate.
FAQ
Q: Should I prioritize debt payoff or saving for a down payment?
A: Paying off high-interest debt first generally saves you money and improves your financial standing.
Q: How does a larger down payment benefit me?
A: It lowers your mortgage payments, reduces total interest paid, and may eliminate the need for private mortgage insurance (PMI).
Q: What is an ideal DTI ratio for mortgage approval?
A: Generally, below 45% is best, but the lower, the better. You should decide what is truly affordable for you. We can help with an affordability analysis before you even start the pre-qualification process. This step can help you gain clarity on what is truly affordable for you.
Ready to plan strategically? Apply for pre-qualification today and let Mortgage Maestro Group help you achieve your homeownership dreams.
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