Why does the amount of my down payment have an effect on my interest rate?

Kitchen of House - Why does downpayment effect interest rate

Lending is largely based on risk, where lower risk loans can have lower interest rates. This can seem abstract. Here’s an example:

If you had two friends who needed to borrow $100, and Friend A already had $20 but Friend B only had $3, which Friend seems like a higher risk to not pay you back the loan?

When you have a higher down payment, your loan-to-value (the value of the property) ratio is lower and the lender has lower risk.

The good news is that 3% down payment programs DO exist and can be a great option for home buyers who don’t want to put a lot of cash down up front.

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