When it comes time to buy, the amount of the down payment has a much greater impact on homebuyers’ willingness than a low mortgage rate, according to a new study published by economists at the New York Federal Reserve.
The survey of buyers and renters found dramatic evidence that the impact of interest rates is highly overrated compared to the impact of even small changes in down payment requirements. The study found that decreasing the required down payment from 20 percent to 5 percent increases the willingness to purchase an average of about 15 percent among all buyers and 40 percent among renters.
Decreasing interest rates on a 30-year fixed-rate mortgage, though it would save the buyer much more than the lower down payment, raised the willingness to purchase a home by only 5 percent on average.
Perhaps not surprisingly, the study also found that the willingness to buy in response to a lower required down payment increases most strongly among the less wealthy respondents (particularly renters). This is consistent with many of them being severely liquidity-constrained.