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I'm in the process of buying my first home (I'm 31 yrs old). The house is ~$188K, I have an annual income of ~$45K. I have no debt and excellent credit. I've been approved for a 30 yr fixed mortgage at around 5.5%. I have ~$156K in cash assets (non-retirement), so I'm definitely going to put down at least 20% as a down payment to avoid PMI. I'm planning on staying in the house at least 7+ years.
The question is, is there any advantage to putting more than 20% down? I'm in a financial position where I could definitely afford to put 25, 30 or even 35% down, but is there any reason to do so?
I'd recommend you google mortgage amortization calculators and plug in various down payment amounts and play around with the numbers. That should give you your answer.
Also, congratulations on being so financially smart! Enjoy your home.
I would also check on what your payments would be and the interest rate for a loan for 20 years and 15 years. The shorter the loan period the lower the rate. So you could still put down the 20% and stick the rest in savings to use in case of emergency. With the shorter term it will make the payments a bit higher but it makes the total interest paid out over the life of the loan MUCH lower. Your in a good position to weigh all of your options.
What about putting 20% down at closing, and then pre-paying towards the principle later, either on a monthly or yearly basis? Any difference in doing it that way as opposed to putting down a larger chunk upfront?
What about putting 20% down at closing, and then pre-paying towards the principle later, either on a monthly or yearly basis? Any difference in doing it that way as opposed to putting down a larger chunk upfront?
Not really. Just make sure that it is in writting that you can pay off the loan early and that extra payments will be applied to the principle.
If you plan on paying extra towards the principal..then I would recommend getting an 'interest only' mortgage.
If you pay extra towards a 30yr fixed mortgage...this will only cut the years off the mortgage'.
If you pay extra towards the interest only...then you're basically paying interest on the ACTUAL money borrowered. You can save a lot more money this way.
5/1 Interest Only Arms are 4.875%-5.0%
7/1 I/O Arms are 5.125-5.25%
Quote:
Originally Posted by dan121
The area is stable.
What about putting 20% down at closing, and then pre-paying towards the principle later, either on a monthly or yearly basis? Any difference in doing it that way as opposed to putting down a larger chunk upfront?
If you plan on paying extra towards the principal..then I would recommend getting an 'interest only' mortgage.
If you pay extra towards a 30yr fixed mortgage...this will only cut the years off the mortgage'.
If you pay extra towards the interest only...then you're basically paying interest on the ACTUAL money borrowered. You can save a lot more money this way.
5/1 Interest Only Arms are 4.875%-5.0%
7/1 I/O Arms are 5.125-5.25%
I really think it would be unwise to take an ARM with interest being as low as it is.
If you have another investment that is going to make you more than 5.5% that you can safely put your money into, then only put down 20%. If you're money is just sitting in a savings account earning nothing and you don't want to invest it elsewhere, put more down.
Since you said that you plan on holding onto the property for 7 years, I'd consider looking at a 15 year mortage. The difference in monthly payments is about $335/month. If you don't think you can invest your extra money elsewhere for over 8% (after taxes on yearly dividends and Interest Income), you'll come out nominally ahead after 7 years. The break even point is around 10 years for considering a 30 year mortgage if you can afford both. This is assuming that a 15 year fixed rated mortage is 5.0% w/ no points.
What's the point of putting down 20% and investing the rest to an investment account that is giving 5.5%?
That doesnt make sense...
With a mortgage your payments are 'front loaded' with the interest.
You will save a lot more money putting it towards your mortgage than trying to make money on it.
If a person knows they will stay there for max 7yrs...then the ARM can be fixed for 7yrs....they're only paying the interest on the mortgage they have. They're not going to be 'front loaded' as they would with a fixed rate mortgage.
Hey, I dont like Interest Only ARMs, and I only recommend it to someone who has a lot of assets...or who makes a lot of money.
You'd put the extra into an investment account making MORE than 5.5% after taxes.
I would only considering an ARM if it was certain that you'd move within 7 years, the ARM was fixed for 7 years at a rate below available fixed rate mortgages, if I believed that the real estate market would appreciate in 7 years, and if closing costs for the ARM were similar or less than the fixed rate counter part.
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Enjoy your home.
