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I just assigned a purchase agreement on a house less than 250K. How much downpayment I should put, 20% or 35%, if I have the cash? I need 20% to avoid PMI. But will we be better off if we put more down? On one hand, we can pay less interest. On the other hand, I heard putting too much cash down will miss other investment opportunities (actually I don't know what to invest given the current economy).. Thanks in advance!
Part of the answer to the question depends on how long you are going to own the home.
If you are planning on owning it only for a short period of time you are generally better off to use other people's money to the greatest extent - minimum down payment and minimize closing costs.
If you are planning on owning the home for the long haul, you can use discount points (which means more closing costs) to lower your interest rate further which will save you money in the long run. That may be a better strategy for use of your cash than increasing your downpayment.
One strategy is to determine the amount of the downpayment you'll use to make the monthly payment what you want it to be, whether that's 20% or more. If this is a house to rent rather than to live in, you'll be trying to make it pencil out with rental rates in your area...meaning a larger down payment could be the best path forward.
Finally, the concept of "opportunity cost" and what ELSE you could do with that money comes into play - but THAT is a question for a good financial advisor.
Part of the answer to the question depends on how long you are going to own the home.
If you are planning on owning it only for a short period of time you are generally better off to use other people's money to the greatest extent - minimum down payment and minimize closing costs.
If you are planning on owning the home for the long haul, you can use discount points (which means more closing costs) to lower your interest rate further which will save you money in the long run. That may be a better strategy for use of your cash than increasing your downpayment.
One strategy is to determine the amount of the downpayment you'll use to make the monthly payment what you want it to be, whether that's 20% or more. If this is a house to rent rather than to live in, you'll be trying to make it pencil out with rental rates in your area...meaning a larger down payment could be the best path forward.
Finally, the concept of "opportunity cost" and what ELSE you could do with that money comes into play - but THAT is a question for a good financial advisor.
Good luck, I hope that was some help.
DavePautsch, many many thanks! It really helps! This house will be my home. I plan to stay there for 3-5 years. In this case, from what you suggested, it seems to be better to buy points or simply minimum down payment and minimize closing costs. However, according to some online rent vs buy calculator (e.g., the yahoo calculator), it would be better to put a larger down payment... Am I missing some important factors when using these calculators?
BTW, we could actually pay the whole loan in 3-5 years if we maximize our the mortgage payment with a large down payment. Will it be financially wise to do it this way?
DavePautsch, many many thanks! It really helps! This house will be my home. I plan to stay there for 3-5 years. In this case, from what you suggested, it seems to be better to buy points or simply minimum down payment and minimize closing costs. However, according to some online rent vs buy calculator (e.g., the yahoo calculator), it would be better to put a larger down payment... Am I missing some important factors when using these calculators?
BTW, we could actually pay the whole loan in 3-5 years if we maximize our the mortgage payment with a large down payment. Will it be financially wise to do it this way?
If you're only planning on living in the home for 3-5 years, it may not be wisest to buy points; the breakeven point is often a matter of 3-5 years, so if you're not planning on staying in the home for longer than that, you are actually not saving money by buying down your rate.
As far as whether it's wiser to put down a larger down payment -- this will largely depend on your long-term financial goals and strategy and what direction you believe the value of your home and other investments will take.
You do need to consider opportunity cost as well (the money you don't put into your house can be invested in something else).
tomorrow, when you use these calculators what about a larger down payment makes it "better"? If its the fact that you'll pay less for the house over the life of the loan - I gotta say - who cares, if you intend to sell it before the 30 year term is up anyway?
The average American owns their home for about 7 years and few people live in their homes through the life of the loans amortization. IF you intend to live in it that long and pay it off - sure make a larger down payment, but when you are looking at a 3-7 year planning horizon it doesn't really matter.
As for not knowing where to put the cash - again, even if you don't know TODAY - if you put it into the downpayment you won't have it TOMORROW (when a new opportunity may present itself).
If you're only planning on living in the home for 3-5 years, it may not be wisest to buy points; the breakeven point is often a matter of 3-5 years, so if you're not planning on staying in the home for longer than that, you are actually not saving money by buying down your rate.
Very good point - in my most recent transaction it would have taken 63 months to recoup the 1-point paid to buy the interest rate down on my 5-year ARM. Since I plan to refinance to a 15 or 20-year mortgage within the next few years I opted to keep the money in my pocket instead.
As for how much downpayment to make - I looked at it two different ways. When I first moved from VA to NC, I wasn't sure how soon I'd find a local job or how much it would wind up paying. I put a large downpayment (more than 40%) on a modest house, so that my monthly payment was quite low ($835). Now it's 2.5 years later and I'm moving again - I'm still buying a modest home, but this time I'm just putting 20% down. I really would have liked to go with a 15-year loan, but since I'm still telecommuting I wasn't comfortable signing up for the higher payment quite yet. So, I went for a 5/1 ARM to buy myself some time. When I do my refi, I will likely put a larger downpayment to get the payment to where I'm comfortable.
I guess I'm saying that I think the other posters brought up good points about what to consider when coming up with a downpayment amount, and I've thought about many of those things myself!
i'm with TraderJack, would rather have some cash reserves than locking in every last penny that you have into your house. Putting 20% to avoid PMI is wise but after that I wouldn't put any more into it. Having the liquid cash gives you far more choices.
i can think of 2 conditions for putting more than 20 percent make sense, which both applied to me.
1. If you have sufficient cash in your savings account even after down payment. (after tax wealth)
2. You will have steady income to take maximum advantage of 401k. (before tax income)
Some closing fees to the lender is proportional to loan amount. So higher down pay will reduce closing fees.
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