Larger vs. Smaller Down Payment
Why a Larger Down Payment is Riskier than a Smaller Down Payment
Many times, I get asked by clients, “is it better to put down a larger down payment or a smaller one?”. As most will tell you, it really depends on your situation, but in my experience, I have found it better to put down as little money as possible, keeping more in pocket. Here’s why:
Yes, it is true that an offer with a larger down payment is more likely to be accepted by a seller (all else equal). Why? Well, a few reasons. One is that psychologically, a seller prefers when a buyer is putting down more money for a down payment vs less, but at the end of the transaction, it really doesn’t matter. The seller is going to net the same regardless. The other reason is that the number one cause of a deal falling apart is the buyer securing the loan. A buyer with a larger down payment (lower debt-to-income ratio) has more “buffer,” making their loan less likely to fall apart.
Knowing the above reasons, I use different strategies to help my clients keep more money in their pocket while also making their offer look most appealing. For example, when my clients have enough money to buy all-cash, I often write the offer as all-cash (with proof of funds), but include language in the offer package allowing them to add financing before closing. This gives them the best of both worlds: a strong offer and the ability to keep cash liquid. Similarly, if a client can put down 20–25% but prefers less, we still structure the offer with a larger down payment while retaining flexibility to reduce it later.
Why Not Just Put More Money Down?
If a buyer has the cash, why not use it? Why not put down 20–25% or even buy all-cash?
The answer: to limit risk.
The common belief is that putting more money down is safer because it lowers your monthly payment. I disagree. In reality, putting more money down increases your risk in three ways:
Opportunity Risk
Liquidity Risk
General Financial Risk (lack of cash during emergencies)
The less you put down, the more risk you shift to the bank—and the less you personally carry.
Example
Let’s say you’re buying a $750,000 property and have $150,000 saved.
Option 1: 20% Down
$150,000 down, $600,000 loan
Mortgage: $3,597/month
Option 2: 5% Down
$37,500 down, $712,500 loan
Mortgage: $4,271/month
You keep $112,500 liquid
Difference:
Option 1 saves $674/month ($8,088/year)
But costs you $112,500 upfront
That means it will take 13.9 years ($112,500 ÷ $8,088) to “break even.”
Most people sell or refinance within 10 years—so you may never actually realize that “savings.”
Opportunity Cost
If instead of putting down that extra $112,500, you invested it:
At 9% (S&P 500 estimate), it grows to $372,718 in 13.9 years
Even at 5% (bonds), it grows to $221,658
So you’re effectively choosing between:
Saving $674/month vs. Potentially doubling or tripling your money
The bank rewards larger down payments with lower rates because you are taking on more risk, rather than the bank.
Real-World Risk (What Actually Matters)
Beyond investment returns, consider real-life risks:
Job loss
Medical emergencies
Divorce or death
Unexpected major expenses
The real danger isn’t a slightly higher monthly payment—it’s running out of cash.
Cash vs. Lower Payment
Using the same example:
Option 1 (20% down): $3,597/month, minimal cash reserves
Option 2 (5% down): $4,271/month, $112,500 in cash
The payment difference is about $700/month.
But if you lose your income:
With Option 1, you may default quickly and lose your home and your original $150K down payment
With Option 2, you can cover 26 months of payments ($112,500 ÷ $4,271)
That’s over two years of breathing room!
The determining factor isn’t the $700 difference—it’s whether you have cash reserves.
Framing It Simply
Option A:
Lower payment, no safety net. Miss a few payments → lose the home.
Option B:
Slightly higher payment, $112,500 cash cushion. You can survive years of hardship.
The safer option is clearly Option B.
Equity vs. Returns
Your property appreciates at the same rate regardless of your down payment.
Example:
$1M home appreciating at 5% = $50K/year
If you have:
$250K equity → 20% return on equity
$50K equity → 100% return on equity
Less equity = higher return on your money.
My Personal Approach
Because of all this, I personally:
Put down as little as possible
Pay loans off as slowly as possible
Regularly use cash-out refinances to access equity
For example, I may refinance a $700K loan into a $900K loan and take $200K cash out—tax-free—to invest or keep as reserves. Yes, the payment increases, but the liquidity and opportunity outweigh the cost.
Final Thoughts
Putting more money down:
Reduces your liquidity
Increases your personal risk
Limits your investment opportunities
Keeping cash:
Increases your flexibility
Protects you in worst-case scenarios
Allows your money to work elsewhere
Conventional advice says “put more down and pay off your home quickly.” But conventional advice often leads to average financial outcomes.
I’ve found that building real wealth and security requires thinking differently—prioritizing liquidity, leveraging debt wisely, and letting money work where it performs best.
Of course, down payment strategy is only one piece of the puzzle. For a broader look at budgeting and figuring out what you can truly afford, check out my full guide on [how much house you can afford in San Diego].
