Using all of your savings on a first-time home down-payment

[jbyoun1990]

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[mhc]

With the low interest rates, I would finance part of the house.

I would not remove any money from tax-sheltered accounts. That space is valuable.

You may want to consider holding some additional funds in reserve just in case the cost of owning a home is more than you thought or if something breaks or goes wrong. You can always make additional payments down the road.

[Kosmo]

Does "100% down payment" mean you're buying the house in cash? Or do you mean to take 100% of your savings to make a 20% down payment on the house?

I'm inclined to say yes to the first case but no to the second.

[jbyoun1990]

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[grabiner]

If you can put more money down without an excessive tax cost, it's usually a good move.

The reason is that you get an immediate return on your larger down payment. If you already have a mortgage and you make an extra payment, that decreases your mortgage balance, but you don't get any money back in your pocket until the mortgage is paid off, so that's a long-term investment. But if you make a large down payment and take out a smaller mortgage, the extra down payment gives you money back every month in lower mortgage payments, so much of the return is short-term.

In addition, the emergency fund you need will be smaller, because you won't have as large a mortgage payment.

Two caveats if you have higher incomes:

If you will be able to max out your retirement plans, then it usually isn't a good idea to withdraw from an IRA ($10,000 from a traditional IRA, or contributions from a Roth); you will permanently lose tax-deferred space. If you can't max out the retirement plans even with the large down payment, then you aren't wasting the space by withdrawing from the retirement plans; you withdraw $10,000 from your IRA this year, and contribute more to your 401(k) in future years because of the lower mortgage payments.

If you are in a very high tax bracket, you may be better off with the mortgage; you would probably want to put enough down to reduce the mortgage to the conforming limit. For example, suppose you live in California and are in a 40% combined federal and state tax bracket. If you can take out a 15-year mortgage at 3%, avoiding that mortgage is a 1.8% return. You can get 2.25% with a bit of risk in Admiral shares of Vanguard's CA Long-Term Tax-Exempt, so you might want to leave the money in that mutual fund and take out the mortage which you could pay off at any time with the bonds. (You might also hold some other taxable investment, but the 2.25% on the muni fund makes for a fair comparison.)

[Default User BR]

Well, I'm a big believer in long-term low-rate mortgages in this environment. I certainly would not deplete precious tax-advantaged space to do anything other than an absolute emergency.


Brian

[retiredjg]

I think paying cash for a house is a great idea if you can afford it. But if it takes almost all your savings, you can't afford it.

[englishgirl]

I would use all of my taxable savings, excluding my emergency fund, if I could buy a house for cash.

But I wouldn't use anything from any IRAs or other retirement accounts.

[Aptenodytes]

Does "100% down payment" mean you're buying the house in cash? Or do you mean to take 100% of your savings to make a 20% down payment on the house?

I'm inclined to say yes to the first case but no to the second.

100% cash, which would also be 100% of the savings, with the exceptions I mentioned.
So... basically like only buying what you can afford

I don't think that's responsible. You need liquidity, and and rates are very low.

[gd]

I found home ownership to be a lot more trouble and expense than I had anticipated. Does your emergency fund include a new furnace and roof while unemployed?

I do not consider it to be a good financial investment, it is a lifestyle choice. I would not use all my savings on a lifestyle choice.

[WHL]

I would never use 100% of my savings for anything. I will also never take money, taxable or non-taxable, out of accounts I consider "for retirement."

What happens when you have your first emergency and have no cash to pay for it? You'll be paying high interest on a credit card or personal loan, which is exactly what you're trying to avoid here.

I would take a small mortgage and keep 6-12 months of expenses in an emergency fund as well as not touching any retirement assets. If you are diligent, you can have the mortgage paid off quickly and be back in saving mode.

[steadyeddy]

Most of the responses on this site are geared toward high earners. My wife and I can only dream of maxing out all our tax advantaged space (more than $46k is available next year) and must necessarily reduce possible contributions to retirement accounts in order to save a down payment. It's ludicrous to think that anyone who cannot save above and beyond $46k in one year cannot afford to buy a home.

All that said, I would not forgo all retirement savings to buy a house for cash.

[Harold]

Whether one chooses to buy his home for cash or not, this is a good mental exercise to go through (an exercise that very few homebuyers do).

The home is becoming a major part of your assets, whether financed or not. The question is whether to have the home asset on its own, or whether to have a home asset offset by a mortgage -- thereby paying a lender for the privilege of having the home as well as assets elsewhere (or if you have insufficient assets, the privilege of owning a home at all).

[Aptenodytes]

Most of the responses on this site are geared toward high earners. My wife and I can only dream of maxing out all our tax advantaged space (more than $46k is available next year) and must necessarily reduce possible contributions to retirement accounts in order to save a down payment. It's ludicrous to think that anyone who cannot save above and beyond $46k in one year cannot afford to buy a home.

All that said, I would not forgo all retirement savings to buy a house for cash.

I'll politely disagree on the premise. I think there's a full range of people represented on the forum, and I am always quite impressed at how people take time to understand a poster's circumstances. There's a lot of empathy here.

In the present case the consensus response is not to sink all the savings into the house purchase, but rather to keep some savings liquid and take advantage of very low interest rates to finance the rest. That advice is good regardless of income level, and actually especially important for lower earners (who have poorer options to cope with a short term liquidity problem).

[mrpotatoheadsays]

Would you use all of your accumlated savings to pay 100% down-payment on a first-time house?

Never.

[slow n steady]

I would use all of my taxable savings, excluding my emergency fund, if I could buy a house for cash.

But I wouldn't use anything from any IRAs or other retirement accounts.

+1
I am young and am aggressively paying off my mortgage as quickly as possible. I am going to max out my 457B and HSA next year, but any extra income will go to the mortgage.

When the house is paid for, a large percentage of our net worth will be tied up in the house, but I don’t see that as a bad thing because we have a large E-fund and could cut expenses to the bone if we both became unemployed. Not having a mortgage will allow us to have more choices when we have children because we will have lower mandatory costs.

If I was in your position, I would pay in cash.

[jbyoun1990]

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[Cash]

Buying a $70k house in cash sounds reasonable. A $700k house, not so much. But both depend on your income.

[nedsaid]

I would not all my savings for a first-time down-payment. This is the definition of house poor.

[jbyoun1990]

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[jbyoun1990]

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[Harold]

I would not all my savings for a first-time down-payment. This is the definition of house poor.

The difference between the two is that the one retaining his savings feels "rich" only because of a loan he has taken out. That is, it's not the method of financing making one "poor" -- it's the act of buying the house.

Not making a judgment either way on whether to buy in cash or not (or a judgment on whether to buy a house at all), just pointing out the seemingly obvious (but often glossed over) fact that for most people houses are a quite expensive purchase.

[CykoNut]

One of the things I believe in is to NOT to use your emotions when dealing with your finances. I'm new to Booglehead but been reading alot of the forum, and my understanding is the the majority here agree with that too, correct?

So if the purpose is "psychological." Or it'll prevent people from spending their savings. It would NOT be a major factor in my decision.

Some of my thoughts are:
- Interest rates are incredibly low. I remember 3.25%/4% for 15/30 year fixed mortgage. When I last was at the bank, I think I even saw 2.??%/3.??%...
- Interest paid is tax deductible, so someone around 34% tax bracket (for state plus federal), with a 4% mortgage, is really only paying about 2.6% in interest.
- If you took the extra money and invested somewhere else, how likely are you going to beat 2.6% annualized on average over 30 years?
- if you put down 20%, you won't have to pay PMI ( I think VA loans don't even have to put anything down, I could be wrong)
- I was told by a real estate agent, by fully paying off your house, it makes it much harder to take out equity during down markets. It makes the bank look worst because they would be issuing a new loan, as oppose to a HELOC. I haven't been able to verify this though.
- Living expenses may increase by alot due to insurance, property tax, home owners association, mello roos, home maintenance, furniture/appliances, etc. Which means your current 6-12 month EF may not last you 6-12 months after the home purchase.
- I don't think you can declare a homestead on your home unless you fully own it (at least I think most banks prevent you if you have a mortgage. ). This shouldn't matter too much unless you're planning to sell and have creditors after you.

These are just some of the factors I could think of off the top of my head, I'm sure there's alot more. But based on these, I would most likely put down 20%, adjust my EF as necessary, invest the remaining into whatever is most suitable. That's what, I would do, everyone's situation is different. E.g. If you have a credit card balance being charged 18% interest, I would pay that off first before investing.

[Default User BR]

One of the things I believe in is to NOT to use your emotions when dealing with your finances. I'm new to Booglehead but been reading alot of the forum, and my understanding is the the majority here agree with that too, correct?

You would think so, until it comes to home mortgages. Then it's all "you'll sleep better" and "you'll feel wonderful" and such.


Brian

[Harold]

One of the things I believe in is to NOT to use your emotions when dealing with your finances.

Thing is that emotions go both ways. I feel interest rates will be higher in the future, I feel I can earn more elsewhere (and I don't even need to acknowledge the additional risk, though if I did I would feel I could handle it), I feel smarter than the market, etc.

Depending on one's disciplined approach to their own financial situation, either conclusion could be appropriate -- and emotion doesn't have to play a role at all.

[jbyoun1990]

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[Aptenodytes]

I totally agree that we shouldn't make financial decisions based on emotions but I think that applies more to things like buying a nicer unaffordable house because you love it. For this scenario, I think the possible financial gain I could make by taking out a bigger mortgage, rather than paying most if it, is not enough for me. In other words, the possible gain is not substantial enough to weigh over the comfort of owning a home. That is how I feel NOW anyways... but I have changed my position too many times, so I may disagree with myself maybe 5 years down the road

I encourage you to think about risk too. Preserving liquidity is very important. You can afford it. Don't squander it, especially with mortgage rates so low.