I recently received a letter from my (US) bank, saying that I was prequalified for a mortgage. There were two options, both 30 year fixed rate, for the same home price total:
- 5% down, with a 6.093% interest rate, and
- 20% down, with a 6.344% interest rate.
Why would I be offered a lower rate with a smaller down payment? This seems backwards, since 5% would be higher risk for the bank.
And why would anyone take the 20% down option? Anyone who can afford to pay 20% immediately can also pay 5%, and presumably could also pay ahead of schedule while taking advantage of the lower rate. Are there any good reasons to take the 20% option?