Dallas Fort Worth Homes and Real Estate for Sale: How Much Difference Does $1000 Make?

This is a quickie, but a very important question that comes up quite often:  How much does a $1000 increase (or decrease) in the loan amount change the monthly payment on a mortgage?  Not that much, actually. 

Why is this question important in the first place?  Buyers and realtors often negotiate contracts in the evenings and the weekends, or at times when the loan officer may not be available, and many buyers panic when they hear the seller countered their offer by a thousand or two thousand dollars thinking this will astronomically affect their payment.  Also, many buyers are under the false impression that adding a few thousand dollars to their down payment will have a substantial effect on their monthly payment.

The truth is usually pretty shocking to most people.  In every case, the difference in monthly payment is under $10 per month (actually way under, in most cases).

The amount of the payment difference per $1000 depends on two main factors: The interest rate and especially the LOAN TERM. 

Here are some examples:

On a 30 YEAR LOAN at 5% INTEREST, a $1000 increase in the loan amount will only increase the payment by $5.37 per month.  Not that much at all.   

On a 30 YEAR LOAN at 6% INTEREST, a $1000 increase in the loan amount only adds $6.00 to the monthly payment.  

On a 15 YEAR LOAN at 5% INTEREST, a $1000 increase only adds $7.91 to the monthly payment.  And at 6% INTEREST, it adds $8.44 per month. 

And likewise, lowering the loan amount by $1000 will result in a savings equal to these amounts as well. 

Yes, it's true this can add up to alot of money over time, but most people will not live in one home for a full 30 years (or keep the same loan, for that matter).  The fact that the difference in payment is so small per month is pretty amazing to many people.  

This is also one big reason why I suggest to buyers that they should consider keeping some money in the bank rather than putting every penny they have saved towards down payment.  Texas does not allow home equity over 80% of value to be cashed out of a homestead, so if you put less than 20% down, you will not see that money again until you sell the house.  

Of course, there are situations where it makes sense to put more money down.  The difference in rate and PMI between a 3% down and 5% down Conventional loan is pretty substantial, for example.

I'm referring more to people who insist on putting all of their money down to lower their payment.  For example, I had some buyers come in this week who had around $10,000 saved.  The minimum down payment for the home they were buying was around $3,500 ($100,000 FHA loan), but they insisted on putting down the whole $10,000 because they were under the impression it would significantly lower their payment.  Once I explained to them that the extra $6,500 would only lower their payment by around $35 per month, they opted to hold on to that extra money instead.  That was probably a wise decision.  It's not unrealistic to expect to spend a few thousand dollars on various items for a new home (furniture, repairs, movers, utility deposits, appliances, etc), so having some reserves after closing is very important to avoid a financial hardship.  It's never a smart decision for a new homeowner to use all of their savings for down payment.  There's just way too much risk that they will default or at least incur some tough financial times.  Don't let the happy emotions of buying a home overshadow good financial common sense.  That's a mistake that I see way too many people make, especially first time homebuyers.