What would you do, put 20% or 26% down payment on house?

[jeebuss31]

We have $119,833 to work with.
Should we:

A. Put 20% and mortgage would be $358,000, P&I will be $1977 and free up $30,000 in cash flow. Our total monthly payments would be closer to $2634

OR---

B. Put 26% and mortgage would be $332,000, P&I will be $1833 and have $3000 in cash flow. Our total monthly payments would be $2460(prop tax will be slightly lower because we're going to bring down the purchase price of house, thus paying some of the down payment to the builder)

I guess our goal is to lower monthly payments, but not eat up all the EF funds. Our builder states that if bring down the final price, the taxes will be assess lower. For example, if the house is $450,000, we can put 7% to lower the final cost($418,500) and the rest will go towards the mortgage. When the county auditor come and survey our home, it'll be off the purchase price of $418k not $450k.

Any ideas?

[maat55]

I would go with option A and keep the larger EF. Your breakeven point is roughly 10+ years. How long will you live in the house?

[momof1in150]

I would put the 20% down but pay an extra $150 a month on the mortgage.

I disagree with what the builder is telling you about the taxes. You taxes are based on the value of the house, not what you paid for it. You might want to call your Assessor's office to find out how they determine the taxes in your town.

[Gjowers]

I would say the answer depends on your current savings. If your savings are adequate and you feel comfortable putting down another 6% then that might make more sense. The payment would obviously be lower and you'll pay less interest over the life of your mortgage. However, these are uncertain economic times and building a house, and homeownership, is often more expensive than you might think at the outset.

[disneysteve]

I would also do the 20% down and keep the EF. You don't want to be house poor, especially with a new home that will need all kinds of stuff that you may not be anticipating.

I agree with momof1in150 that taxes are based on the value of the home, not the purchase price. If that were the case, folks could cheat the system by doing cash deals off the books when they sell. Instead off selling for $400,000, they could sell for $350,000 plus 50K in cash under the table to lower the property taxes.

[jIM_Ohio]

I am for the larger downpayment if the break even point is around 4-6 years.

How quickly could EF be up to 30k?
How much lower are taxes?
What is difference in amount borrowed?
30 yr fixed I assume in both cases?

[creditcardfree]

I vote for 20%. Hold the other cash for at least 6 months...you can always send it in later. It won't change the monthly payment, but it would bring you closer to paying the mortgage down.

[MonkeyMama]

I'm with Jim - need more info.

If you could really lower your taxes with a larger down payment, then I am all for that. But only if you could build up your cash reserves rather quickly. (But not if you were facing layoff, cutbacks, etc.)

If jobs were secure, and cash could be grown quickly, I Would go for the bigger down payment. Just a lot of factors at play.

FWIW, we put 25% down on our current home, and no regrets there, but we also had a decent cash reserve (like 9 months EF) after the down payment and were saving a large percentage of our income, to cash. We also had many reasons - knew our income would go down (future kids) and our preference was a lower house payment. But we also valued liquidity, and kind of balanced both best we could.

OF course, then, the best interest rates were in the 7% range. Interest rate is most definitely an important factor.

Certainly not a one-size-fits-all answer!

[jIM_Ohio]

I have given some thought to this, and I have more spreadsheets available...

Assuming you can bank the $180/mo savings:
I see a 5.25% mortgage (payment of $1977) or a 5.25% mortgage (payment of $1833).

The $144 difference pays off the second loan about 5 years sooner (56 payments). I would strongly consider using the 30k to pay down the mortgage and then bank the extra payments by applying them to principal or some investment with a 6%+ long term outlook.

I would add a third set of numbers here for a 15 year fixed and look at that too. I have an extra $845 showing 15 year payoff (at 5.25%) and my guess is the rate goes down to point where it would be something to consider (if you have $30k extra). You have $144 of the $845 now (and the 30k could provide another 4 years of payments on the 15 yr).

This assumes you have a plan to increase the EF if you choose to liquidate it.

[disneysteve]

I'm with Jim - need more info.

If you could really lower your taxes with a larger down payment, then I am all for that. But only if you could build up your cash reserves rather quickly. (But not if you were facing layoff, cutbacks, etc.)

If jobs were secure, and cash could be grown quickly, I Would go for the bigger down payment. Just a lot of factors at play.

I agree with this. If you have a reasonably secure job and anticipate that you could rebuild your EF relatively quickly, it would make sense to have a smaller mortgage.

[MiikeB]

I am with the smaller down crew. 20% keeps you from PMI, anything beyond that is overkill IMO. If you have a 5% mortgage, and in the 25% tax bracket, you are essentially really only paying 3.75%. That is not hard at all to beat with long term, very safe, investments.

[Merch]

"20% keeps you from PMI, anything beyond that is overkill IMO"

True in this case not in all. In my case 20% down would have caused be to get a jumbo mortgage which would have added 25 basis points to the loan.

I put about 45% down on my house. It's all about risk. The large the monthly payment, the larger the risk you have.

[jIM_Ohio]

I am with the smaller down crew. 20% keeps you from PMI, anything beyond that is overkill IMO. If you have a 5% mortgage, and in the 25% tax bracket, you are essentially really only paying 3.75%. That is not hard at all to beat with long term, very safe, investments.

This might be true for a rental, but if this is a house a person lives in, having it paid off makes sense, so a higher down payment also makes sense.

[MonkeyMama]

Depends on your age too. & your assets.

If you are 60, I don't think it's wise to buy a house with 20% down.

But yeah, 2 more things I should have asked OP. (& I hadn't even thought of the JUMBO loan thing).

[boosami]

I agree with momof1in150 that taxes are based on the value of the home, not the purchase price.

Property taxes are initially out of whack for just-built properties. Depending on where you live, they may treat your "purchase price" as a temporary assessment for property tax purposes. Maybe the laws in your area only utilize the mortgaged value as the temporary assessed price. Other places, you pay taxes on only the land value (and not the residence) until construction or conversion has been completed for a full year.

Regardless, your property taxes may see a beneficial effect for that first year, but after that it will be based on the assessed value of your home as normal. So, you might save the first year, but don't expect to save every year forward. They'll go right up to expected value from then on.