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I'm thinking of buying my first home soon and trying to get a grasp of how my down payment can impact my financial future.
I know that I want at least 20% down; if for nothing else to at least not pay mortgage insurance. What I'm trying to figure out is - how does putting down 20% compare with say 30 or 40%.
I've heard the arguments that its better to not put much over 20% down because you lose the investment potential on that money because its locked up in the house.
Wouldn't it be just as good to have a lower monthly mortgage and have more money each month to invest?
I strongly suggest to take some time and draw up a monthly budget that extends for at least the next year. Without regards to the 20%, the budget obviously includes your monthly pay as income, and any other known income sources. For expenses, make sure you capture everything you can think of - mortgage, real estate taxes & home insurance (which both may be wrapped into your mortgage), car payments, and all other monthly payments for debt (credit cards etc. putting in at least minimum payments), average monthly costs for food, household, medical, etc. Restaurants, any planned travel. Again, try to capture everything.
With that, you start with all funds available to you. Then you see the impact of your budget on funds (hopefully you are saving money each month), and then you factor in a down payment to see where your balances might be at years end. Use varying down payments. And remember a budget can't account for surprises like home or car repair, medical, etc.
thanks for the tips
Aredhel - how much do you recommend a home owner have for emergencies. I would assume minimum 6 months of expenses?
Metalmancpa - I'll run the numbers under different scenarios. I actually have a straightforward budget since I live pretty frugal and have no debts or car payments and I have steady employment. I don't intend to buy even close to what the bank is pre-approving for and going to try to keep my living expenses as close to what they currently are while renting. I guess when the time comes I'm not sure how much of my savings to put in the house - my gut tells me as much as I can since I hate having debt.
I guess I should also mention I do not have a good retirement plan set up yet although I do have a mutual fund and some stocks.
thanks for the tips
Aredhel - how much do you recommend a home owner have for emergencies. I would assume minimum 6 months of expenses?
These days a year's expenses would be safer, as it can take many people over 6 months to find a new job if they lose their current one. But that's more savings than many people can manage early in their careers.
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I don't intend to buy even close to what the bank is pre-approving for and going to try to keep my living expenses as close to what they currently are while renting.
This is smart! Don't let yourself become house-poor.
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I guess when the time comes I'm not sure how much of my savings to put in the house - my gut tells me as much as I can since I hate having debt.
House debt is secured debt, though, which makes it rather different from typical consumer debt. In the worst-case scenario, you lose the house, but the debt won't keep dogging you indefinitely (unlike student loans and credit card debt sans bankruptcy).
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I guess I should also mention I do not have a good retirement plan set up yet although I do have a mutual fund and some stocks.
I would prioritize this over paying extra on the house, frankly.
It's good to have a paid-for house - but it's better to have a ton of money in the bank. If you can't achieve both, aim for the latter. What good is wealth that's tied up in a very illiquid asset?
There are some good recommendations in this post. One thing that new homeowners often fail to realize is that the cost of owning a house extends far, far beyond just the house payment! Things will happen and they will cost money-sometimes a lot of money! They will break (at inopportune times). One can easily end up with 10k-20k in bills. So, always have a substantial emergency fund as there will come a day when you will need it.
There is absolutely no reason to put any more than 20% down (especially with today's rates). This gives you the flexibility of having extra cash in case of emergencies or other unforeseen expenses. If after several months or years you feel you would like to pay down the mortgage faster you can always make additional principal payments and accelerate your term.
I.E. you can always borrow more initially and then pay it down faster, but once you've taken out the loan you will either have to refinance or take out a second mortgage, HELOC, etc if you need to come up with more cash.
If your investment allocation is super-aggressive, the ideal down payment is about 25% as that gives you the lowest rates. Otherwise, more is better since it makes no sense to hold bonds paying 2% and a mortgage costing 4% simultaneously, apart from a small amount for rebalancing and assuming adequate liquidity.
Of course 20% is good still, and it doesn't make sense to wait to save up more if rent costs more than opportunity cost, interest, taxes, insurance, and maintenance (net of any federal tax breaks and house appreciation).
As to how big an emergency fund needs to be, 6 months is the usual suggestion, though if you are buying a fixer upper or very old house, or if your job is on shaky ground, 12 months is probably better.
I recently bought a house and went through the same thing. While I had the means to put down more, I stuck with 20% because every $10K more I added only lowered my payment $50/month or so. I plan on paying a little extra each month towards the principle as well.
I'd rather keep the extra funds liquid so I can invest, or maybe even do a few upgrades.
Also, I prefer to keep a 12-18 months E-fund.
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