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Financing

More Money, More Problems: When a Big Down Payment Could Spell Trouble

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big down payment

Hey, there's nothing wrong with making a sizable down payment -- if you've got the money to support it. Financial experts advocate putting at least 10% or 20% down, and we've got to agree: The more you can pay at the start, the easier managing your mortgage will be.

But there's a caveat: Sometimes putting down a ton of cash can actually wind up compromising your quality of life or future savings goals. In some cases it can actually hinder your ability to close on that dream home you spent so long saving up for.

Here are five reasons you might want to dial down your payment.

You'll flush your emergency fund

"Under no circumstances should buying a house be an emergency," says Jeff Jones with Longview Financial Advisors in Huntsville, AL.

Raiding your emergency fund for the sake of a giant down payment isn't smart -- and it means you're more likely to find yourself in a terrible position if you lose your job or wind up otherwise financially incapacitated.

Jones recommends building a three- to six-month emergency fund -- the longer the better, especially if you have kids -- and "not touching it unless it's truly an emergency."

And remember: Building this emergency fund comes first -- before buying the house or even building your 401(k).

If your home-buying aspirations mean you're skipping the safety net, you need to take a step back and save first. Don't plunk down a huge down payment if it means leaving yourself vulnerable.

You won't be able to cover closing costs

Don't let the massive specter of your down payment make you blind to all of the other expenses that come with closing on a home, which can run about 3% to 6% of the purchase price (although there are ways to reduce them).

If you've put all your money toward one massive down payment, you're sure to be surprised by the myriad expenses -- fees, taxes, the cost of an independent home inspector -- all of which need to be paid once your sale is final.

And, of course, the ultimate closing cost: moving itself.

It might not be much -- maybe just the cost of pizza and beer for your buddies -- but if you're moving cross-country or even cross-city, costs can easily inch into the thousands, Jones says.

You might not be able to afford the mortgage

Ever heard the term " house poor"? It refers to buyers who have more house than they can afford, and are in over their head with mortgage and tax payments. Scary stuff.

Trust us -- you don't want to be one of those people.

While this is common among buyers who can offer only the smallest possible down payments, it's also a potential problem for people who put down more than they can afford. If 20% down strains you, chances are good that the costs associated with owning that home are going to strain you, too.

Your home might be empty

Let's face it, an empty home is hardly a home at all -- and if you've spent all your money on the excessively massive down payment, your home might be empty for a while. What's the purpose of buying a new home if you can't afford the sofa sectional to put in it?

Especially if you're moving from a smaller apartment into a home, there's nothing sadder than an endless succession of empty rooms. It's not that you need lavish accommodations -- really, this is just another symptom of buying more than you can afford -- but wouldn't it be nice to at least put a bed in the guest room?

Retirement, vacations, college -- all might be out of reach

So you've poured all your money into a down payment, and you're squeaking by just to pay the mortgage. The potential result: no money left over for the other things that matter in life.

"A lot of clients find their happiness in discretionary income," Jones says.

Large monthly bills begin to eat into your discretionary income, and even your retirement savings. Sure, you're a homeowner now. But burdening yourself with more than you can afford is a surefire road to unhappiness.

"The greatest risk is that you don't refocus your attention on retirement and long-term goals," Jones says. "The less stress there is about money, the better."