Question regarding buying home with a large downpayment

[swd1]

I need an advice regarding following.
I am considering buying a home to live in.
I am a low risk investor and with current low CD rates,
I am thinking about putting in a large downpayment on the
house - say even 70 to 90% of home price (if possible)
The thought is to "save" on the interest.
Any comments/ suggestions regarding this will be great.
Thanks,
Liz

[sandrark]

We don't know enough to give you a good answer.

1) Is this all your cash, or some of it?
2) Do you have retirement investments?
3) How old are you?
4) Do you have a separate emergency fund set aside?
5) Is this your first house?
6) Is it new construction, or existing?

Personally, I'm NOT a fan of having all my eggs in one basket. The volatility of one asset class isn't what I need.

What if you put down 80%, and then the housing market continues to decline. Wouldn't you have been better off to have put down less, and stashed the cash in CDs or some other stable place?

This is why I have a house, a stable job, a large cash cushion, and regular retirement investing. If one area declines, another is typically doing well.

IF you have 6 months of cash in the bank; IF you have no debt; IF you are investing for retirement; IF you are setting aside some money already for kids' college, and IF you have a "house maintenance fund" already set aside, then I'd be OK with putting down 50% plus as a down payment. But not before.

My .02 worth...

Sandi

[gamecock43]

This I dont understand. The What if you put down 80%, and then the housing market continues to decline. Wouldn't you have been better off to have put down less, and stashed the cash in CDs or some other stable place?

If you buy a $150k house and put down the normal 20% (30k) then you pay $550 a month in interest, and $135 in principle (now everyone knows what my bill looks like). For 1 year your house declines in value but you keep making the payments. After 1 year, you have paid over $6000 in interest and only $1600 in principal. After this 1 year you sell. You feel you are in a losing investment. You sell for $140k. You have lost 9k AND you have lost $6000 in just interest=$14k!

But if you had put 100% down (I cant do the math on 80% right now)...you saved your $6000 in interest payments....so you only lose 10k.

Same thing if a house appreciates $10k in 1 year before you sell. If you spent $6k in interest payments...that's really an appreciation of $4k...not the $10k if you had put 100% down (And I am not calculating amortization tables or interest tax breaks...I am a poor math student).

So the whole, putting all your eggs in one basket, staying diversified- I get that. But since the numbers are that you end up paying about $120k in interest over 30yrs on a $100k house...why NOT put down 100% (or as close to it) and save yourself the $120k over the 30yrs?

It's painful upfront, but cheaper in the long run.

[zetta]

In a catastrophic financial situation (perhaps due to job loss or medical issues) where you were simply unable to make the mortgage payments and had to let the house go into foreclosure, you'd walk away with a higher net worth by having made a smaller downpayment and keeping your money in other investments. Just an example, not a recommendation.

[gamecock43]

True. Good point. Didn't think of it that way.

[sandrark]

Yup, liquidity matters.

Also, I assumed a 15 year mortgage. Not 30. With a 15 year mortgage, the interest costs on borrowed funds are significantly reduced.

Sandi

[gamecock43]

Still, I put down 40% myself, and have no regrets. I feel like I am a bit ahead of the curve with my smaller mortgage payments and ability to save more going forward from my monthly paycheck.

Though 40% was not all I had. It was about 90% of my liquid savings...so I felt like I was putting everything I had into my down payment. But it was only a small portion of my overall assets...so I get your point to stay diversified.

[scfr]

You could also save up a bit longer and perhaps pay cash for the house. (Or buy slightly less house with what you have saved now.) In some cases, you will be able to get a better deal as a cash buyer, and you would never have to worry about the situation zetta outlined.

[tripods68]

In the midst of economic downturn, 20% down payment is sufficient. You don't want to throw everything else in the home, when there are many things you can use that cash for EF or retirements. Beside OP can always add extra principle payments anytime.

[Ima saver]

I took on a $50,000 mortage on a $500,000 house. I hated paying interest, so I kept my mortage "in house" (local) That way, I could make an extra principal payment every time I made a regular payment at the bank. I got that mortgage paid off in 2 years and never regretted owing my house free and clear.

[wincrasher]

Well, if you have the money to choose between investing and paying a larger down payment, you simply have to look at your potential return and the security of the investments.

It's hard to find yields above 5% right now, so you are probably better off financially with the larger down payment. Just mind how important liquidity is to you. In this uncertain economy, I'd rather have the money in the bank and make those mortage payments.

[Alex_Adviser]

Paying 20% down often qualifies you for a lower rate and saves you from having to buy mortgage insurance. Paying more than 20% only makes sense if you have an aversion to debt or if you think the property will provide a better financial return than putting that money in stocks or other investments.

[Merch]

I think it depends how you look at the house. In other words, are you looking at this as an investment? Are you looking to sell when the market goes back up? In this case, it would make sense to put 20% down and use other people's money.

If you however are looking to keep the house until you are carried out feet first, I would say pay off the house. You aren't looking at it as an investment. In this case, you would look at reducing risk and eliminating the mortgage. In other words, you wouldn't have to worry about being foreclosed on.

That's how I would play this. Good luck.