I am looking into buying a $400K house with my wife. We currently do not own a home and do not have kids. We are both employed and my wife is a tenured public teacher.
As of present, we can put a 40% down payment and still have enough left for initial fees, 12 months emergency fund and items for the home.
Is it wise to put down such a large down payment?
I’m reading conflicting reports that investing such a large down payment in this market is bad because of the fluctuating real estate prices. However, I don’t understand how paying interest on that extra borrowed money is any better.

BZA,

Congratulations on being so fiscally responsible. Enjoy your new house.
Yes, I would put 40% down if you have the emergency fund.

The more you borrow the more you have to pay in interest. The more interest you pay the bigger tax write off you get.

You need to ask your tax consultant if you can take advantage of the extra interest come tax time. If not put the 40% down.

Quote:

However, I don’t understand how paying interest on that extra borrowed money is any better.

It's not and it NEVER is.

Only bankrupt bankers and brain dead broker dealers tout how "borrowed" money is a good thing or that the tax deductibility of mortgage interest is somehow mathematically better than having the income in the first place. It never is.

Broker Dealers and their certified clueless clown Registered Representatives have been advising clients for the past 10 years to refinance or take out a home equity loan and put that money in the market and you'll be way ahead. That's "how" they find investment money where no money actually exists.

They characterize home equity as a "dead asset."

We've all witnessed how well that type of voodoo financial advice has worked out. Bankers and Investment Firm Brokers are an incestuous duet.

True story:

I know a person who was talked into taking out a home equity loan from a so-called financial advisor at the bank 3 years ago so she could pay "cash" for a Corvette and tax deduct the interest.

The home loan is still outstanding, the house is upside down loan to value,... but gee-whiz.....she DID PAY CASH FOR THE CORVETTE.

Americans are broke because they want to be.

__________________
Gary Spicuzza, *SAFE
Copyright 1956.
No Rights Reserved.
*Self Appointed Financial Expert

See, that's what I NEVER understood. Borrow $50K more, and pay $2,500 extra interest per year on that amount...then get what, 16% of that money back!?!? Wow, get $400 back in a tax refund? You still spent $2,100 in interest!!!!

I don't understand why people say, "but you get a tax break" when it comes to borrowing insane amounts of money for a home, don't they realize that you are paying for all of thay money + more!?!?!!?

Exactly bza123!


Simple 4th grade math is all ones needs to do.

Follow with me:

For every $1.00 of mortgage interest a person pays in a 28% tax bracket they get back 28 cents on the dollar.


Had that same $1.00 of mortgage interest been shown as taxable income they would have paid 28 cents to the Gubment but they keep 72 cents in their pocket.


Who's better off?


A person with 28 cents in their pocket or the person with 72 cents in their pocket.

__________________
Gary Spicuzza, *SAFE
Copyright 1956.
No Rights Reserved.
*Self Appointed Financial Expert

I agree, you should make the down payment since you can afford it. These low and no down payment home loans were created to facilitate people who wanted to buy a home but could not come up with at least a 20% down payment. With no/low down payment loans the banks could make more loans meaning more money to them.

I usually suggest to my clients in your position to put the money down on the house and establish a line of credit (LOC) against it. If they ever see an opportunity to make a quick profit on a project pull the money from the LOC, do the project and payoff the line with the proceeds (interest is only paid on the amount of the LOC that is actually used). Talk to your investment/accounting/tax professional for proper advice on any potential investment though.

The smaller the down payment the better for the banking industry. As for the rest of us the less interest we pay the better. Put the 40% down and forget it, if your market's home prices are still going down the only thing you could do is wait to buy.

Has anyone ever noticed that the better the bankers where doing the worse the rest of us did.

Anyone interested in seeing what debt really costs check out the example on Budgetingsense.com's Cost of Debt Example just follow the below link.

Personal Budget and Budgeting

All great advice. 4th grade mathematics. Put the 40 down and continue to watch your savings grow.

Well, the bigger the downpayment, the less interest you will have paid at the end (provided all other things are equal). Just make sure you have a good sum saved up in case one of you can't work for whatever reason. I was in a similar position about 7years ago, and because I didn't leave much in the account I was struggling for a while. You can check this calculator, which will show you the breakdowns.

I think is makes lots of sense to make a low down payment only if you buy an investment property. Try to see my logic here:

You see, if you have $40,000 cash for down payment (+ emergency funds), then you could afford 40% down for a $100k house. If it is an investment property (yielding approx. 10%/yr), you would be paying off mortgage + all the interest. Simply put, your equity would be increasing at certain rate. 10% yield out of a $100k investment would mean close to $10k a year. That is all approximate and many things were not accounted for (such as management problems, APR, vacancy, and terms).

At the same time, if you make that $40k a 20% down payment, you would be able to afford a $200k home. This house, even though is is going to have a higher monthly mortgage payment because of lower down payment, would increase your equity at $20k per year. Twice as fast comparing to earlier example. Note that initial investment was still $40k! Of course, there is a bit more risk because higher monthly payments mean less liquid cash coming from the tenants. Again, many factors were not considered, but principle is shown.

But if you buy a house for your own living, please, by all means, put 40% down.


Vlad

This is a case where the right answer lies within you. The argument really can be made either way. Keeping the money liquid allows you more flexibility, but you are right in saying that there is a lot of money in interest that you would be paying with a lower down payment. By having at least 20% down, you are also avoiding the extra cost of mortgage insurance. Things you need to ask yourself are: How much money am I making by keeping that money in other investments? How do I feel about the housing market? Am I buying a house that I can easily afford to pay off faster than the prescribed loan term? Will I still be able to rebuild my savings after taking on this mortgage? Do I already have a retirement savings plan that is separate from the emergency funds I now have? The one good thing is that either way you go, putting the large down payment or having a large cash reserve places you in a better position if for some reason you have to get out of the house quickly. The only thing that makes the large down payment riskier is the case where you decide to walk away from the home and stick the lender with it. What you don’t want to do is put tons of money down and then overextend yourself on the loan payment itself.
Outside of that scenario, which hopefully is not one that you are ever forced to consider, it really comes down to where you think you have the best rate of return on your money. If the interest that you spend on the mortgage is more than offset by your expected return on that money in investments, it would make sense to put less money down. If you absolutely don’t trust riskier investments then you might be better off putting more money down and minimizing your interest costs as you suggested. There are calculators at Compare Mortgage Rates | CD Rates | Credit Cards Home Equity Loans Mortgages Best Rate Calculator Bankrate.com that can help you compare money used as down payment versus that same money at specific rates of return as an investment. Don’t forget to factor in mortgage insurance as an additional cost on the loan if you should put less than 20% down. You might end up finding that 20% is the magic number because of that factor.
Essentially, what I am saying is that you are making investment decisions. Since I am not a certified financial planner, it is not my place to give direct investment advice, but hopefully I have given you enough food for thought to come to your own conclusion.
www.debt-mgt.org

Rich people by assets and poor people buy liabilities.

my ex. family paid a large down payment, they only saved a couple hundred bucks a month, and they still lost their house so the large downpayment they could have had in some CD or somewhere else is gone!