Why is a larger down payment beneficial to a home investor?

• A. It leads to higher monthly mortgage payments.
• B. It reduces the amount of interest paid over the life of the mortgage.
• C. It increases the total purchase price of the home.
• D. It eliminates the need for property insurance.

Answer: (B)

Verified step by step guidance

1. Understand the concept of a down payment: A down payment is the initial upfront payment made when purchasing an asset, such as a home. It is typically expressed as a percentage of the total purchase price.
2. Recognize the relationship between the down payment and the loan amount: A larger down payment reduces the amount of money that needs to be borrowed, which in turn decreases the principal of the loan.
3. Analyze the impact on interest payments: Since interest is calculated on the loan principal, a smaller loan principal (due to a larger down payment) results in lower interest payments over the life of the mortgage.
4. Consider the monthly mortgage payments: A larger down payment can lead to lower monthly payments because the loan amount is smaller, reducing the financial burden on the borrower.
5. Evaluate other financial benefits: A larger down payment may also eliminate the need for private mortgage insurance (PMI), which is often required for loans with smaller down payments, further reducing overall costs.