Higher Downpayment a Good Idea?

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in_securities
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Higher Downpayment a Good Idea?

Post by in_securities »

Okay, here's my deal.

My wife and I are looking to purchase our first home. We have been diligent about saving and have a decent amount of cash ready for the down payment. I've proposed
two scenarios below and would love any insight into the situations below.

I'm gonna keep these numbers generic for convenience.

We can buy House A for $500k with a downpayment of 20% thus taking out a $400k mortgage
OR
We can buy House B for $600k with a downpayment of 33% thus taking out a $400k mortgage

House A is in a less desirable part of town, not bad by any means, but closer to areas that can be a little dicey, thus appreciation may be less likely.
House B is in a much more desirable part of town where the median house prices are much higher. I ASSume this house has a better chance of appreciation than House A.

So, the monthly nut will be the same, but we'll no longer have access to that additional downpayment money (our emergency fund of 6-8 months of expenses is not affected by the larger downpayment). I know many on the forum would say that the extra $100k might be put to better use investing in an index fund via a taxable account. Would the long term yields of that $100k invested in VTSAX or VFINX minus capital gains be the smarter move? Or, is it better to purchase a home of better value that is more desirable and look at the $100k as $100k that I didn't pay 4% interest on over 30 years?

Thanks in advance.
Grt2bOutdoors
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Re: Higher Downpayment a Good Idea?

Post by Grt2bOutdoors »

Location, location, location!! I purchased a home at the tail-end of 2007, just in time to see property values start to plummet, now values are starting to come back, I can't say the same for other sections of town where the other neighbors have failed to keep up the homes. I'm not saying you won't or can't be impacted by property value depreciation, you can, but homes that are in neighborhoods seen as less than desirable will or can experience significantly higher levels of price decline. On the other hand, if the neighborhood is gentrifying, the homes seen as undesirable today could very well be tomorrow's gems.
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investor1
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Re: Higher Downpayment a Good Idea?

Post by investor1 »

After factoring in the cost of ownership, such as taxes, insurance, increased utilities and maintenance/repair costs, sales costs, mortgage costs, I think houses are usually an inefficient investment.

Buy the house you want to live in.
playtothebeat
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Re: Higher Downpayment a Good Idea?

Post by playtothebeat »

investor1 wrote:After factoring in the cost of ownership, such as taxes, insurance, increased utilities and maintenance/repair costs, sales costs, mortgage costs, I think houses are usually an inefficient investment.

Buy the house you want to live in.
Second, third, and fourth this.

In general, no need to look at a house as an investment. Is it where you want to live? Can you afford it? Great, buy it. If not, don't. Renting might be cheaper. It might not be. It has some benefits, and some disadvantages.
FredL
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Re: Higher Downpayment a Good Idea?

Post by FredL »

I am not an expert, but if I were you I would do this way. Since the difference between the mortgage payments won't be that much with 30% down and 20% down, I would put 20% down. I will pay one more month on principle each year, so paying off the 30-year mortgage could be shortened to something like 22 years. This way you could save a lot of interest. In the mean time, using the extra money to buy Vanguard's Total Bond Index Fund or ETF.
Almost there
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Re: Higher Downpayment a Good Idea?

Post by Almost there »

We put 40% down, 15 year mortgage and are adding $200/month which goes to paying down principal. This also shortens the life of the mortgage.

Almost there
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tractorguy
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Re: Higher Downpayment a Good Idea?

Post by tractorguy »

IMOP you should buy the house you're going to be happiest with for the longest time. Saving money on a house to put more in the stock market is a bad decision if you end up moving again in 3 years because you've outgrown it or the neighborhood is worse than you thought it was. The transaction cost of buying and selling a house is likely going to eat up any extra money you would have made by investing the $100K.
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tylerdurden
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Re: Higher Downpayment a Good Idea?

Post by tylerdurden »

investor1 wrote:After factoring in the cost of ownership, such as taxes, insurance, increased utilities and maintenance/repair costs, sales costs, mortgage costs, I think houses are usually an inefficient investment.

Buy the house you want to live in.
Agreed.
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Louis Winthorpe III
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Re: Higher Downpayment a Good Idea?

Post by Louis Winthorpe III »

I would buy the more expensive home. Paying a premium to live in a better part of town is well worth it, IMO.
Ron Ronnerson
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Re: Higher Downpayment a Good Idea?

Post by Ron Ronnerson »

Louis Winthorpe III wrote:I would buy the more expensive home. Paying a premium to live in a better part of town is well worth it, IMO.
I agree.
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Toons
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Re: Higher Downpayment a Good Idea?

Post by Toons »

tylerdurden wrote:
investor1 wrote:After factoring in the cost of ownership, such as taxes, insurance, increased utilities and maintenance/repair costs, sales costs, mortgage costs, I think houses are usually an inefficient investment.

Buy the house you want to live in.
Agreed.

:happy +2
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Topic Author
in_securities
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Re: Higher Downpayment a Good Idea?

Post by in_securities »

Thanks for all the feedback.

I agree that spending more to be in the nicer part of town is the way to go, it's also the house that we happen to love. On a purely financial level though, is it unwise to put more money down
when you can use that money for investing or having a jumbo emergency fund at the ready if need be?

I ask because a colleague of mine said that putting more money down is a bad idea because if the mortgage were to go underwater, you may have to walk away and thus lose a lot more money.
My reasoning to him was: buying a home is like long-term, buy and hold, investing - the worst thing you can do is to sell when the economy tanks. There were great deals to be had in real estate from 2010-2012 because of people who sold their severely depreciated homes. Had they held on, assuming they could, their home values would've most likely recovered by now. Is there any merit in my colleagues argument?
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bertie wooster
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Re: Higher Downpayment a Good Idea?

Post by bertie wooster »

Get the nicer house - you won't regret it.

As for your friend, putting more money down significantly reduces the risk of your mortgage being underwater. I don't think his argument holds much merit.
Dandy
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Re: Higher Downpayment a Good Idea?

Post by Dandy »

I think a lot depends on how you feel about dicey.

If you are a first time home buyer I would suggest that you may not be aware of how expensive owning a home can be. Sure you factor in mortgage, interest, taxes and even heating bills. But, there are plenty of other expenses involved. So, whatever you choice make sure you have not let yourself with insufficient cash/income.

I believe studies have shown that houses are not great investments. Sometimes the market value soars but overtime I believe housing prices tend to be close to general inflation levels. So put more emphasis on location, finances, safety, design, etc than potential profit.
SleepKing
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Re: Higher Downpayment a Good Idea?

Post by SleepKing »

Just my spare change,

-I would go with the home you feel is best suited for your family. Your family no doubt has worked very hard to get in this position and, assuming you can reasonably afford either option, reap some fruit of your labors!

-I agree with everyone saying do not look at your personal residence as an 'investment', rather a tool for living and enjoying life. Personally, I had such horrible experiences with apartments, 'affordable' locations, etc... I made it a point to not settle for anything but exactly what I wanted when purchasing our first and now most recent home. It wasn't cheap, but we make it work fine in our budget and have not regretted anything! In fact, we had to pay ~30k negative equity to get out of our first home (bought at start of crash), but you know what? It was safe, quiet, peaceful for the first 5 years of our marriage and allowed us to start our family on our terms. That is invaluable IMHO.

-We also struggle with the concept of 'prepaying' vs. 'after tax investing' with larger downpayment, extra payments to principal, etc... I do not know the answer for you, but after examining our entire financial picture, we are probably going to 'split' our available after tax investing budget 50/50 for mortgage prepayment (we are 4.45% rate) and after tax investing. The cool thing is this: If we want to change our approach depending on market forces or life situation over the years we can! By budgeting responsibly and leaving flexibility built into your finances we can shift funds as our life circumstances dictate. We can be both in the market AND put extra to reduce our debt. Whichever turns out to be the best choice...let's revisit this thread in 20 years to know for sure!

Sleepy
kaudrey
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Re: Higher Downpayment a Good Idea?

Post by kaudrey »

Why don't you put 20% down on the better house? I don't see why getting the house you want means you have to put more down (as a %). If you want to save on interest, see how the math works for a 15 or 20 year mortgage; or, over time, you can make extra payments as your cash flows allow.
DDMP20
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Re: Higher Downpayment a Good Idea?

Post by DDMP20 »

playtothebeat wrote:
investor1 wrote:After factoring in the cost of ownership, such as taxes, insurance, increased utilities and maintenance/repair costs, sales costs, mortgage costs, I think houses are usually an inefficient investment.

Buy the house you want to live in.
Second, third, and fourth this.

In general, no need to look at a house as an investment. Is it where you want to live? Can you afford it? Great, buy it. If not, don't. Renting might be cheaper. It might not be. It has some benefits, and some disadvantages.

I agree with this. I'd say buy the cheapest home you feel comfortable living in and then do whatever you can to minimize the costs associated with owning that home; taxes, energy, etc etc
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in_securities
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Re: Higher Downpayment a Good Idea?

Post by in_securities »

Bertie - I was pretty sure his argument didn't hold much weight but wanted to confirm with my fellow Bogglers. Thanks!

Dandy - Being a first-time home buyer, I'm trying to wrap my head around how much of a cushion to have considering all of the unforeseen costs of home ownership. Would the 6-8 months emergency funds suffice, or should I increase it a little more?

SleepKing - Thanks for your detailed answer. Maybe I'll take the same approach and split that extra $100k down the middle. I'm not really looking at home purchase as an investment but I do like the idea of being able to sell my home in the distant future for at least what I paid for it. My concern is that if that dicey area expands and engulfs my home I'm looking at a considerable loss. I think I've already made up my mind anyway and will opt for safety and comfort.

kaudrey - I want to keep the monthly nut at a set amount that is comfortable for us that's why I'm thinking of putting more down.
DDMP20
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Re: Higher Downpayment a Good Idea?

Post by DDMP20 »

OP, since this is your first time buying a home I think the best piece of advice aside from the strictly financial stuff is to be as unemotional as you can. Don't get trapped into the thought process that has you thinking you've found the one and perfect home for you and that you just can't let it go. You need to pay what your brain is telling you is the right amount for YOU for a particular home, not the realtor, not your heart, not your spouse or your in-laws or uncle Mel......

If you have to let a home you like go don't worry about it. It's not the end of the world. The right one at the right price will come along eventually. But YOU need to decide that.
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ShiftF5
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Re: Higher Downpayment a Good Idea?

Post by ShiftF5 »

For me #1 has always been finding the right house. Of course location is very important, but it's just got to feel right.

Then I figure the exact down payment, etc.

I've always liked putting more down and paying it off ASAP. But that's just me.

Having no mortgage is a wonderful feeling.

Best wishes.
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ivyhedge
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Re: Higher Downpayment a Good Idea?

Post by ivyhedge »

bertie wooster wrote:As for your friend, putting more money down significantly reduces the risk of your mortgage being underwater. I don't think his argument holds much merit.
...or water!

I had to: it's Friday.
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in_securities
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Re: Higher Downpayment a Good Idea?

Post by in_securities »

ivyhedge wrote:
bertie wooster wrote:As for your friend, putting more money down significantly reduces the risk of your mortgage being underwater. I don't think his argument holds much merit.
...or water!

I had to: it's Friday.

BADA BOOM. "Take my wife, please..." Nice one :D
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Re: Higher Downpayment a Good Idea?

Post by JupiterJones »

in_securities wrote: We can buy House A for $500k with a downpayment of 20% thus taking out a $400k mortgage
OR
We can buy House B for $600k with a downpayment of 33% thus taking out a $400k mortgage
House differences aside... If you can afford a $200k down payment on House B, why would you not make the same down payment on House A, leaving you with just a $300k mortgage?
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in_securities
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Re: Higher Downpayment a Good Idea?

Post by in_securities »

JupiterJones wrote:
in_securities wrote: We can buy House A for $500k with a downpayment of 20% thus taking out a $400k mortgage
OR
We can buy House B for $600k with a downpayment of 33% thus taking out a $400k mortgage
House differences aside... If you can afford a $200k down payment on House B, why would you not make the same down payment on House A, leaving you with just a $300k mortgage?
That is also a possibility. I guess I was leading the question toward House B. I want to live in House B because of the desirable area but didn't want to take out any more than a $400k mortgage to maintain a comfortable monthly payment. When I began the thread I was led to believe that paying more than 20% down is a bad idea, but it seems like a perfectly fine financial decision.
Grt2bOutdoors
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Re: Higher Downpayment a Good Idea?

Post by Grt2bOutdoors »

Keep an e-fund of more than 6 to 8 months, especially if your income is unpredictable. I would not be able to sleep at night holding just 6 to 8 months in the bank.
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bberris
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Re: Higher Downpayment a Good Idea?

Post by bberris »

bertie wooster wrote:Get the nicer house - you won't regret it.

As for your friend, putting more money down significantly reduces the risk of your mortgage being underwater. I don't think his argument holds much merit.
Tell me about the risk of being underwater. There are no margin calls.
Krischi
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Re: Higher Downpayment a Good Idea?

Post by Krischi »

I agree that 6-8 months EF are not enough. Also keep in mind that especially during the first year of homeownership you may get hit with a number of deferred maintenance items. We've needed around $15,000 in liquidity during the first year alone to cover unexpected stuff related to the house. We've recovered some of it through insurance, but the bottom line is that having only 6-8 months would have resulted in a dangerous shortage of cash for us.
DDMP20
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Re: Higher Downpayment a Good Idea?

Post by DDMP20 »

Krischi wrote:I agree that 6-8 months EF are not enough. Also keep in mind that especially during the first year of homeownership you may get hit with a number of deferred maintenance items. We've needed around $15,000 in liquidity during the first year alone to cover unexpected stuff related to the house. We've recovered some of it through insurance, but the bottom line is that having only 6-8 months would have resulted in a dangerous shortage of cash for us.

I agree with you Krischi. I see a lot of people saying a 3-6 month ef is adequate but I've never felt comfortable with that. We have roughly a year. It's a highly subjective thing and there are so many unique factors based upon an individual's situation but you made a great point about unexpected home repairs/maintenance. Roof issues, burst pipes, septic tanks, major appliance failure, electrical issues, paint, etc etc etc Combine that with vehicle maintenance and repair and the monthly budget can certainly take a hit.
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ResearchMed
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Re: Higher Downpayment a Good Idea?

Post by ResearchMed »

DDMP20 wrote:
Krischi wrote:I agree that 6-8 months EF are not enough. Also keep in mind that especially during the first year of homeownership you may get hit with a number of deferred maintenance items. We've needed around $15,000 in liquidity during the first year alone to cover unexpected stuff related to the house. We've recovered some of it through insurance, but the bottom line is that having only 6-8 months would have resulted in a dangerous shortage of cash for us.

I agree with you Krischi. I see a lot of people saying a 3-6 month ef is adequate but I've never felt comfortable with that. We have roughly a year. It's a highly subjective thing and there are so many unique factors based upon an individual's situation but you made a great point about unexpected home repairs/maintenance. Roof issues, burst pipes, septic tanks, major appliance failure, electrical issues, paint, etc etc etc Combine that with vehicle maintenance and repair and the monthly budget can certainly take a hit.
These unexpected expenses can be, well, expensive, and might easily bunch up at the start.
The previous/current owners may have been a bit lax about preventive maintenance if they knew they'd be selling. They'd focus on things that could make the house more attractive, and things an inspector will be likely to notice. But chances are good, especially if it isn't an almost-new home, that they are aware of other things that "will need care/replacement".
All of those "things" are part of home ownership, and it can add up, but doesn't always.

Now, about the down payment... Is the interest rate different for 20% vs. 30% down?
It usually is for a 30 year vs. a 15 year mortgage.

However, we'd still rather be "committed" to a lower mortgage payment, where we can easily pay additional amounts regularly or on occasion (being careful to specify the extra goes for *principal*).
Similarly, we'd rather put down less rather than more, again so we have the flexibility.
You can start paying extra each month right away, but again, that's your choice, and if cash flow gets tricky, you've got that "pot" still set aside.
(I don't think I'd use that pot for risky investments, under this circumstance. Keeping it relatively safe and accessible is part of this strategy. But this is a somewhat conservative approach, which is similar to putting that money into the larger down payment. If your income goes up unexpectedly or there are other positive financial changes, you can always dump that amount into the mortgage - for *principal* only - at any future time, should you decide to do so. You can't take it back, if things change for the worse.)

As for being underwater and losing more money, that's pretty much nonsense. If you have to sell and the property has lost value, then if you had the money in the down payment, yes, you'd lose that. Otherwise, with a smaller down payment, you'd be underwater, and have to "pay" for the privilege of selling.
It's the same money *UNLESS* you are willing to walk away from the underwater home debt and pay the price via serious credit hit, moral regret, and perhaps significant legal fees.
That's a very serious step to take, and not something one should be considering going into a home purchase. (Not here on BH anyway.)

Buy the home you love in the better location, if you can afford it.
Keep extra on hand for repairs and maintenance, as it WILL cost more than you expect, unless you are lucky.
But you'll enjoy the house/location as your "home", the place you return each day, etc.
And it will hold it's value better, or perhaps appreciate more.
(Just don't buy it based upon appreciation. If it does appreciate, that's frosting.)

RM
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JLJL
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Re: Higher Downpayment a Good Idea?

Post by JLJL »

in_securities,

I'm with Kaudry and Almost There. I don't really understand the concept of putting higher % down on the more expensive place. I understand the point you make about wanting the same outlay each month. But why is that important? Comparing it to income? But the extra $100k in the bank would more than make up for the cash flow "tightness" if you don't tie it up in the home.

More important may be the loan terms. Can you do it with a 15yr fixed? Have you run the numbers looking at the total interest? PenFed has my favorite calculator and amortization reports.

Yes rates are cheap, but you see lots of folks here who see great value in the certain return of paying off the mortgage fast.

I would probably put 20% down on the higher cost house and get a 15yr mortgage, but keep some of the extra cash handy. Nice not to be strapped for cash.

I agree with Research Med comments as well. The 30 year preference comes at a cost in order to have flexibility over a 15 year. It is a trade off worth pondering either way.

Nice post, good luck!
staythecourse
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Re: Higher Downpayment a Good Idea?

Post by staythecourse »

My two cents are you have not given enough information to get the advice you are looking for. I treat a house as a LARGE, illiquid purchase so think the best move (pun intended) is to buy where you can stay in the house as LONG as you need and don't NEED to sell in any circumstance unless you choose.

So questions I want to know are: How old are you two? Are your jobs rock solid? Any job relocation expected in the next 5-10 yrs? Any thoughts of wanting to move some other part of the country anytime soon? Any kids? If one has kids how many and how old? Any plans of more kids? How are the public schools?

The numbers you put out there I don't think matter as long as you keep the mortgage, property taxes, any insurance needed to 25% of your take home salary.

The key to buying a house is to make sure you are the one controlling your life in the near future and NOT the house, its costs, and the housing market.

Good luck.
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Almost there
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Re: Higher Downpayment a Good Idea?

Post by Almost there »

Staythecourse wrote:
My two cents are you have not given enough information to get the advice you are looking for. I treat a house as a LARGE, illiquid purchase so think the best move (pun intended) is to buy where you can stay in the house as LONG as you need and don't NEED to sell in any circumstance unless you choose.

So questions I want to know are: How old are you two? Are your jobs rock solid? Any job relocation expected in the next 5-10 yrs? Any thoughts of wanting to move some other part of the country anytime soon? Any kids? If one has kids how many and how old? Any plans of more kids? How are the public schools?

The numbers you put out there I don't think matter as long as you keep the mortgage, property taxes, any insurance needed to 25% of your take home salary.

The key to buying a house is to make sure you are the one controlling your life in the near future and NOT the house, its costs, and the housing market.

Good luck.
You are right on with what you wrote especially you
controlling your life in the near future and NOT the house . .


The first house we purchased, the house definitely controlled us. Bought for $25,000 in 1975 and sold for $35,000 in 1978. In the meantime we had (luckily) higher earnings but still it was terrible being controlled by the house and will never forget it. But a lesson was learned which has never been repeated. Now my partner and I are definitely in control.

Almost there
poker27
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Re: Higher Downpayment a Good Idea?

Post by poker27 »

So sounds like you settled on the house, now you just need to decide how much you want to put down. I agree with others, I would keep a minimum of 9 months in an EF, after that you need to address your long term goals? Is this a long term house you would like to pay off some day? If so, you can either keep the cash invested elsewhere or put everything toward at the beginning, and continually pay down the principal.

Our next house will be our 'long term house' (hopefully), and I'm not sure which way I will go. Thankfully I've got a while
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in_securities
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Re: Higher Downpayment a Good Idea?

Post by in_securities »

Just wanted to give an update:

We didn't end up buying either house. We put a bid on the house we wanted and it quickly became a bidding war with several other parties. We gracefully bowed out of the feeding frenzy.

Thanks again for all the responses. Some great points were made and I think, ultimately, we're going to lower our housing budget. Having never owned a home, we want to make sure we have ample money for repairs, maintenance, etc.

Thank You
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