Home buying-Why 20% down?

[homebound]

I haven't found a clear answer to this. Why does 20% consistently come up as the "sweet spot" for a home downpayment? I understand the PMI issue, but is there a disadvantage to putting down more? I would think the more you can put down, the better-decreasing the interest you pay across the life of the mortage. Not that I'm in a position to do it, but is there a disadvantage to buying a home in full? I've had people tell me that there are tax benefits to having a mortgage, but I don't see how that could offset the huge amount of interest you pay longterm.

Thanks! This is a great forum. I really appreciate all of the advice.

[banditfist]

The 20% down is not for you. It is proof to the lender that you can handle money and have a foot in the game for the house.

This is what will quickly return to. See, a lot of these foreclosure issues going on stem from people not only not being able to afford their mortgage, but what is the incentive to keep paying on a house that you paid $100k that is only worth $80k. But, you only put down either 0-5%. You have no incentive, but the lender just lost 15-20% of their money.

The thoughts that real estate only goes up is just not true.

You bring up a great point about the mortgage tax break. What sense does it make to pay $10,000 in interest to save paying Uncle Sam $2,500. 10,000 is >>than 2,500. But, the area where the mortgage tax break should evaluated is in a buy verses rent decision. You must also take into account the standard deduction. If I take the standard deduction ($9,300 I think), and compare it to the mortgage deduction (say I pay $10k in interest). Then, my real savings is only about a third of $700.
Additionally, the maintenance on a home just about balances out the mortgage tax break in a rent-verses-buy decision.

[Ima saver]

I bought a house quite young and paid it off in 10 years. that was over 30 years ago. I have had 3 new houses since then, all paid for in full, so I have not paid one penny in interest in 30 years.

[disneysteve]

is there a disadvantage to putting down more?

There could be. It depends what else you could do with that money.

We bought our home in 1994 with 20% down. Our mortgage rate is 5.875%.
The largest single investment in our portfolio has a 15-year average annual return of 13.16%. So by not putting down a larger downpayment and instead investing the money, we've come out way ahead.

We put down 20% to avoid PMI but no more than that. The rest goes to investments that generally earn more than a bigger downpayment would save.

[jIM_Ohio]

The mortgage tax deduction is a deduction which is not phased out at high AGIs- so very rich people (read AGI above about 160k mfj) get this deduction even if most other deductions were phased out for their income.

The larger houses also tend to appreciate more (as a % of home value) per year, so the mortgage deduction on a large house is a great investment for someone willing to leverage themselves to invest.

For example my mortgage deduction decreases my tax bracket from 25% to 15%- a 10% savings. This allows my Roth contributions to be in a lower tax bracket, which is great investing wise as well.

[homebound]

The mortgage tax deduction is a deduction which is not phased out at high AGIs- so very rich people (read AGI above about 160k mfj) get this deduction even if most other deductions were phased out for their income.

The larger houses also tend to appreciate more (as a % of home value) per year, so the mortgage deduction on a large house is a great investment for someone willing to leverage themselves to invest.

For example my mortgage deduction decreases my tax bracket from 25% to 15%- a 10% savings. This allows my Roth contributions to be in a lower tax bracket, which is great investing wise as well.

Thanks again for all of the responses. I'm realizing that I'm over my head here. I really think I need to meet with some kind of financial advisor. I don't know what all the "adjustments" are in AGI, but if my side work goes well, high AGI issue could apply to me. I also live in one of the most expensive areas of the country. Salaries are generally higher than elsewhere (though doesn't make up for additional living costs). For example, two school teachers with ten years of experience, or an upper-level middle manager, could easily hit 160.

I think I'll make another post asking what kind of financial advisor I need. I have two jobs, one is a professional practice. My annual income will be anywhere from 20 to 100% more than my base salary (changing my tax burden considerably). I know nothing about tax deductions for business expenses, home ownership, etc. Based on responses I've gotten to previous posts, my retirement plan seems to be reasonable...but these other issues are really over my head.

Thanks again for all of the responses!

[okaythen]

got a question I can buy a house with cash, but like someone said you can invest in some mutual fund and get higher then the mortgage rates. I am kind of a trust fund boy so I might not really qualify for a good rate if I get the mortgage. I am thinking about just pay for the house cash and then borrow money against the house and invest in it. my question is what's the difference between the 2 is there a difference? by the 2 I mean getting mortgage when purchasing the house or borrow money against the house after I bought it with cash. thanks a lot

[disneysteve]

I am thinking about just pay for the house cash and then borrow money against the house and invest in it. my question is what's the difference between the 2 is there a difference? by the 2 I mean getting mortgage when purchasing the house or borrow money against the house after I bought it with cash. thanks a lot

The difference is that home equity loan rates are typically higher than mortgage rates. Bankrate.com is listing the average 15-year fixed rate mortgage at 5.77% and a 50-75K HEL at 7.62%. So borrowing against home equity and investing is a little more difficult since you are paying an extra 2% in interest.