20% Down Payment Sub-optimal?

[neophyte1]

I came across an interesting post from someone elsewhere on the internet (to properly source, from user 'sardinesgivepower' on reddit -- mods, let me know if I should link) regarding reasons why a 20% down payment on a home is sub-optimal. The Bogleheads stance is seemingly always 20% down or don't buy it, and for good reason it seems, however I'm curious if this person has a point here. Thoughts? Anything they said here wrong or inaccurate?

"I'll piggyback with this about PMI and why I prefer 5% down. (Conventional only.)

• 1. Housing prices are usually rising. Unless you think you can time a collapse, which are rare, you will pay more for your house in 2 years than you would now. I'll be using 250k/5% rate as my baseline housing price throughout this post. Putting 5% down costs you 12,500. Putting 20% down costs you 50,000. If you're buying in the 250k range there's a good chance that 37.5k could take another 2 years to save up for. At average growth rates in an average state, you're paying another 20k for that home in 2 years. Sweet, you saved 9-10k in MI payments and tacked on an additional 20k in PI. You might say that you pay less interest if you wait 2 years because you are financing less, even at the higher price. This is true, but if you really want to do that you just make curtailments every month with money you would have otherwise been saving for 20% down. Now you have the lower UPB, pay less interest, and payoff sooner. This vastly outweights that piddly MI.
  
  2. Well Sardines, I got a nice inheritance so I can actually afford the 50k down payment, I should do it now right? Not if you don't need to! Financing at 5% means you pay 170k in interest life of loan and probably 9-10k in MI depending on the state. 180k of "wasted" money (ignoring tax goodness.) At 20% down you pay 143k in interest and 0 MI. Sweet, you saved 37k over 30 years. DO YOU KNOW HOW BAD THAT IS? If you put 37.5k into the market and got annual returns of 4% (bad) you'd make 80k in that same time frame. 80k > 37k. Also, you have access to that money, whereas if it's just in equity it's tougher to tap into. With average S&P returns you'd make over 150k more putting it into the market than your down payment.
  
  3. What if another collapse happens? Well there's 2 scenarios. You keep your job and can wait it out, so your equity is irrelevant. What if you can't afford the house though? A lot of markets dropped 50% in the last collapse. Whether you put 5% or 20% down, most borrowers will be underwater. Do you want to lose 12.5k or 50k? Also! Guess what, we have our S&P investments. It sucks that it's likely down quite a bit, but if you can cash out and make your payments, you keep your home, which will someday get value back. Or you walk away from the home and still have money in the stock market. These are the biggies. Really, the only upside of putting 20% down is a lower monthly payment, but if the change in monthly payment from 5% to 20% impacts your ability to pay, you are buying outside of your means as it is. I guess if your credit is bad you'd need the 20%, but most people with bad credit aren't saving enough to put 20% down on a house. (Barring inheritance.)
  
  4. So how did this myth start? Well it didn't used to be a myth. Interest rates used to be insane. I still see thousands of borrowers in the low 10s. Remember that 37k we "saved" earlier by putting down 20%? At a 7% interest rate that number is closer to 75k. At a 10% rate it's over 100k saved. Also, we're looking at a 70% payment different instead of a 20% one. Putting down 20% was good advice in times of high rates, but it's pointless now.

TL;DR- Low rates and a thing called the stock market makes 20% down a bad idea these days.
Source: I get paid to figure this stuff out."

[dsmil]

I'm about to put either 5% or 10% on a house and don't mind at all. 3.5% interest rates and monthly PMI payments for a few years is a fine deal to me. Rather than saving for another 3 years for 20%, and risking unknown interest rates, that money is going straight into the market.

[John Laurens]

Interesting, I prefer the 100% method.

Regards,
John

[jackholloway]

Based on the recent past, the markets grow faster than home prices, so why not leverage and borrow to invest in the market?

Because the recent past is not all the psast. We might see flat or negative returns. Similarly, home prices go up over the long term, but whether they will over the next few years is not clear. The analysis attached assumes up front that because prices tend to go up, then they will go up in the next two years, and that because w have low rates now, refiing will be similarly positive in the future. That may be right, but mortgage insurance is expensive at 5% down.

When I bought, home prices were lower, and my first mortgage was at 7%. My second was at 9%, and cheaper by far than mortgage insurance. Compare actual prices, and multiple scenarios.

Hone purchase is a balancing act between current credit, future income, and future growth of rents, hone prices, and the alternative places you would have put your money.

[KlangFool]

OP,

1) My neighborhood is one of the best in terms of real estate price recovery for this area since 2008/2009 recession. But, the house price is still below the 2004/2005 level.

2) Most folks that cannot afford 20% down payment has no extra money to maintain the house. Much less investing in the market.

3) See (2). Please note that the difference between a recourse and a non-recourse loan. In a recourse loan state, you do not just lose the house. The debtor can go after the rest of your asset too.

4) We just need another recession to remind folks of the danger.

Please disclose whether you are a real estate agent. So far, all your posts encourage folks to buy a house with less money down without remaining folks of the danger.

KlangFool

[neophyte1]

OP,

1) My neighborhood is one of the best in terms of real estate price recovery for this area since 2008/2009 recession. But, the house price is still below the 2004/2005 level.

2) Most folks that cannot afford 20% down payment has no extra money to maintain the house. Much less investing in the market.

3) See (2). Please note that the difference between a recourse and a non-recourse loan. In a recourse loan state, you do not just lose the house. The debtor can go after the rest of your asset too.

4) We just need another recession to remind folks of the danger.

Please disclose whether you are a real estate agent. So far, all your posts encourage folks to buy a house with less money down without remaining folks of the danger.

KlangFool

KlangFool,

No, I am not a real estate agent. And your "all your posts ... " comment is grossly inaccurate. A majority of my posts are not mortgage or even housing related, nor do they encourage or advocate anything. I have no skin in the game and I'm trying to learn. Additionally, I didn't even write this post as it's copied from another site. Thank you for your reply.

[Hoosier CPA]

I'm new here, and I don't get paid to figure this stuff out, but you can't do a proper analysis of ROI without considering risk. You state that if the housing market goes bust, you'll still have your S&P investments, but those would like go down also in the event of a real estate bust, perhaps at a faster rate. In a world where everything rises in a value in a straight line over time, then yes, we should all pull any penny of equity out of our homes and invest it in the market. S&P returns over time always are higher than interest rates on mortgages, except when they're not.

[Admiral]

These kinds of analyses crack me up. They throw lots of numbers around to make it look complicated, when it fact it's quite simple:

One cannot compare a known return (the cost of a fixed mortgage) with one of an unknown and unknowable return (the stock market) and use that as the basis for judging risk/return.

If you want to compare a 4% mortgage with a fixed-interest investment vehicle, then fine: Sure, instead of putting my $50k down on a 4% mortgage, I'll buy TIPS returning 5% and come out ahead, guaranteed, unless the US gov't doesn't honor its obligations.

But stocks don't always go up, and the price of any particular house is variable. You're not buying the entire real estate market, you're paying for a specific house, the value of which is not fixed until you pay for it. should have said "price is not fixed" and value is variable.

These analyses seem easy with low interest rates ("The stock market will always beat 4%") but less easy with rates going higher. Recency bias.

[AntsOnTheMarch]

Interesting, I prefer the 100% method.

Regards,
John

[alex_686]

• 1. Housing prices are usually rising. Unless you think you can time a collapse, which are rare, you will pay more for your house in 2 years than you would now. I'll be using 250k/5% rate as my baseline housing price throughout this post.

Historically housing has increased somewhere between 0% to 2% inflation adjusted.

3 points.

First, you might get to 5% if you include imputed rent. The rent you pay yourself for living in your own home instead of renting it out. You need this to make a apples to apples comparison of renting your current place. I would included imputed rent in my calculations - while it is more complicated but more correct.

Second, you need to figure things out on a risk adjusted basis. At 0% to 2% inflation adjusted housing looks less special.

Lastly, yes you can stay in the house and ride out a housing crash. Or can you? What if your dream job pops up in another city, you get married, or you find out your are having twins. Having 20% down means you can probably sell and move. Flexibility and having options is valuable.

Look, it depends on the situation. 5% down can work and it might be optimal for somebody in a crash constraint. But the case is less robust then you make it out to be.

[BolderBoy]

TL;DR- Low rates and a thing called the stock market makes 20% down a bad idea these days.

This was a common refrain in 1998-99. Thousands of people took out second mortgages on their homes to "invest in the market that cannot go down." The "Man on the Street" interviews at the time were priceless.

When people are willing to borrow money to invest in the stock market, we may have reached a market top.

[alex_686]

One cannot compare a known return (the cost of a fixed mortgage) with one of an unknown and unknowable return (the stock market) and use that as the basis for judging risk/return.

I disagree. One has to. Do you invest your money in safe low return instruments like TIPS or paying down a mortgage or do you risk your capital in stock market. One is making a choice, there are opportunity costs to these decisions. Making these decisions are done under uncertainty and risk and comparisons must be made. The error bars may be wide and be guided by heuristics.

[sunny_socal]

TL;DR- Low rates and a thing called the stock market makes 20% down a bad idea these days.

This was a common refrain in 1998-99. Thousands of people took out second mortgages on their homes to "invest in the market that cannot go down." The "Man on the Street" interviews at the time were priceless.

When people are willing to borrow money to invest in the stock market, we may have reached a market top.

Quite true, I remember my haircut lady telling me how they were getting into flipping houses, someone else told me how they were constantly "pulling money" from their house (as if it were free $$.) The crash happened about 6 months later. I had a close friend who bought 6 houses prior to the crash, highly leveraged of course. When the crash came he couldn't hold onto them and lost everything. He moved into his parents' basement.

I think the answer to the OP's suggestion is very old skool: Buy Less House!

[Admiral]

One cannot compare a known return (the cost of a fixed mortgage) with one of an unknown and unknowable return (the stock market) and use that as the basis for judging risk/return.

I disagree. One has to. Do you invest your money in safe low return instruments like TIPS or paying down a mortgage or do you risk your capital in stock market. One is making a choice, there are opportunity costs to these decisions. Making these decisions are done under uncertainty and risk and comparisons must be made. The error bars may be wide and be guided by heuristics.

I risk some capital in the stock market, and I invest some capital in bonds with very low risk. Because I understand my risk tolerance.

If one does not care about market volatility, risk, the chance of losing a job and not being able to make a larger mortgage payment, the risk of falling r.e. values , the risk of having to sell at an inopportune time.... then sure, of course, put as little down as possible, pay more in interest, pay PMI, and hope for the best.

I would argue that that is a) not a rational way to look at the problem; b) wishful thinking; and c) not a particularly nuanced understanding of risk.

[Valuethinker]

One cannot compare a known return (the cost of a fixed mortgage) with one of an unknown and unknowable return (the stock market) and use that as the basis for judging risk/return.
..
These analyses seem easy with low interest rates ("The stock market will always beat 4%") but less easy with rates going higher. Recency bias.

These 2 points seem to me to be key:

- paying down a mortgage is a certain return
- stocks pay a highly uncertain return, negative is possible

Further:

- there is a correlation for many between the stock market (as a marker of recession and other economic challenges) and the employment prospects (or even unemployment prospects). That's also probably true of the housing market. Every recession in the postwar years has, I believe, included something of a slump in the housing market (although 2008-09 which was caused by that, is an outlier)
- recency bias is clearly getting to people

[Valuethinker]

I came across an interesting post from someone elsewhere on the internet (to properly source, from user 'sardinesgivepower' on reddit -- mods, let me know if I should link) regarding reasons why a 20% down payment on a home is sub-optimal. The Bogleheads stance is seemingly always 20% down or don't buy it, and for good reason it seems, however I'm curious if this person has a point here. Thoughts? Anything they said here wrong or inaccurate?

"I'll piggyback with this about PMI and why I prefer 5% down. (Conventional only.)

• 1. Housing prices are usually rising. Unless you think you can time a collapse, which are rare, you will pay more for your house in 2 years than you would now. I'll be using 250k/5% rate as my baseline housing price throughout this post. Putting 5% down costs you 12,500. Putting 20% down costs you 50,000. If you're buying in the 250k range there's a good chance that 37.5k could take another 2 years to save up for. At average growth rates in an average state, you're paying another 20k for that home in 2 years. Sweet, you saved 9-10k in MI payments and tacked on an additional 20k in PI. You might say that you pay less interest if you wait 2 years because you are financing less, even at the higher price. This is true, but if you really want to do that you just make curtailments every month with money you would have otherwise been saving for 20% down. Now you have the lower UPB, pay less interest, and payoff sooner. This vastly outweights that piddly MI.
  
  2. Well Sardines, I got a nice inheritance so I can actually afford the 50k down payment, I should do it now right? Not if you don't need to! Financing at 5% means you pay 170k in interest life of loan and probably 9-10k in MI depending on the state. 180k of "wasted" money (ignoring tax goodness.) At 20% down you pay 143k in interest and 0 MI. Sweet, you saved 37k over 30 years. DO YOU KNOW HOW BAD THAT IS? If you put 37.5k into the market and got annual returns of 4% (bad) you'd make 80k in that same time frame. 80k > 37k. Also, you have access to that money, whereas if it's just in equity it's tougher to tap into. With average S&P returns you'd make over 150k more putting it into the market than your down payment.
  
  3. What if another collapse happens? Well there's 2 scenarios. You keep your job and can wait it out, so your equity is irrelevant. What if you can't afford the house though? A lot of markets dropped 50% in the last collapse. Whether you put 5% or 20% down, most borrowers will be underwater. Do you want to lose 12.5k or 50k? Also! Guess what, we have our S&P investments. It sucks that it's likely down quite a bit, but if you can cash out and make your payments, you keep your home, which will someday get value back. Or you walk away from the home and still have money in the stock market. These are the biggies. Really, the only upside of putting 20% down is a lower monthly payment, but if the change in monthly payment from 5% to 20% impacts your ability to pay, you are buying outside of your means as it is. I guess if your credit is bad you'd need the 20%, but most people with bad credit aren't saving enough to put 20% down on a house. (Barring inheritance.)
  
  4. So how did this myth start? Well it didn't used to be a myth. Interest rates used to be insane. I still see thousands of borrowers in the low 10s. Remember that 37k we "saved" earlier by putting down 20%? At a 7% interest rate that number is closer to 75k. At a 10% rate it's over 100k saved. Also, we're looking at a 70% payment different instead of a 20% one. Putting down 20% was good advice in times of high rates, but it's pointless now.

TL;DR- Low rates and a thing called the stock market makes 20% down a bad idea these days.
Source: I get paid to figure this stuff out."

1. it's a risky strategy. Lower mortgage is a certain return, stock market could even have negative returns

2. if you have stability of employment to ride a long slump, then it could work in your favour as mortgage money is not subject to margin calls, whereas a brokerage account, say, is

3. if you can afford a bigger downpayment on a house, the mortgage is generally cheaper (PMI). That's a real dollar saving. It's not theoretical

4. an equivalent risk free strategy, say bank CDs, has a pre tax return of c. 1.0% Having less mortgage pays significantly higher returns

5. if your personal circumstances change, and in recessions they can change pretty abruptly (layoffs, relocations etc.)* then having a house in negative equity could be a very great pain-- really limit your options, and in worst case destroy your personal finances

6. there is a correlation between housing markets and stock markets. The next bear market in stocks will hit homes to some extent (2008-09 was however probably an outlier, where the residential housing crash actually caused the bear market in stocks). See point 5

* there is no such thing, any longer, as a totally safe job. Municipalities get into trouble and lay off firemen and police. Government departments are outsourced. Universities have fiscal problems. "safe" companies get taken over and costs and people slashed. Healthcare is a hugely expensive industry and healthcare providers face price cuts from insurers and the government, individuals just choose to go without care in a recession, etc.

[AlohaJoe]

reasons why a 20% down payment on a home is sub-optimal

I have lived in several countries where a 20% downpayment wasn't the standard.
In one country 5-10% was the standard (for new home buyers, that is people who aren't bringing equity from a previous home to the table)
In another country 30%+ was the standard

20% isn't "optimal". It is just tradition in America.

That said, I'll swim against the current and say that this strategy has merit. Any time someone doesn't liquidate their entire portfolio when they buy a house and pay 100% cash, they are engaging in a variant of this, IMHO. (You could take out all those Roth contributions without even any penalties or taxes so you have no excuses!)

But no one (well, hardly anyone) takes money out of their Roth to supplement a down payment because they agree that the (unknown) portfolio returns will outweigh (certain) return on a lower mortgage.

3. What if another collapse happens? Well there's 2 scenarios. [...]

I think the original poster is a bit too cavalier here, though I agree with many of her points. In many cases, being underwater on a house doesn't really mean anything (other than behavioural wealth effects...) so long as you are able to cashflow the payments. But I think to make a better case, they need to provide a more detailed model of how these downside scenarios play out. After all, this is what people worry about....

If you're interested in a poorly written book on this general topic, check out Thomas J. Anderson's The Value of Debt from your local library. They aren't good, so don't pay money for them. And he's extremely repetitive -- he's somehow written 3 nearly identical books on the same subject. But he takes the same basic idea as your redditor and applies so rudimentary math & projections to show how it might play out.

[Jags4186]

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.

If your rent is $1000/mo and the refrigerator goes, you still pay $1000 that month. If you get an invasion of ants and the exterminator needs to come, you still pay $1000 that month. It’s freezing outside and a pipe bursts? Inconvenient yes, but still $1000 for the month. And if all 3 of those happen at the same time? You still pay $1000 that month.

If you can’t save a measly $50k then maybe you can’t afford a $250k house?

[TomatoTomahto]

If your rent is $1000/mo and the refrigerator goes, you still pay $1000 that month. If you get an invasion of ants and the exterminator needs to come, you still pay $1000 that month. It’s freezing outside and a pipe bursts? Inconvenient yes, but still $1000 for the month. And if all 3 of those happen at the same time? You still pay $1000 that month.

Heck, you might even get a rent abatement. Another reason I suggest to my kids that owning a house isn’t always what it’s cracked up to be. #fauxadulting

[TheHouse7]

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.

If your rent is $1000/mo and the refrigerator goes, you still pay $1000 that month. If you get an invasion of ants and the exterminator needs to come, you still pay $1000 that month. It’s freezing outside and a pipe bursts? Inconvenient yes, but still $1000 for the month. And if all 3 of those happen at the same time? You still pay $1000 that month.

If you can’t save a measly $50k then maybe you can’t afford a $250k house?

+1

[AlohaJoe]

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.

If your rent is $1000/mo and the refrigerator goes, you still pay $1000 that month. If you get an invasion of ants and the exterminator needs to come, you still pay $1000 that month. It’s freezing outside and a pipe bursts? Inconvenient yes, but still $1000 for the month. And if all 3 of those happen at the same time? You still pay $1000 that month.

If you can’t save a measly $50k then maybe you can’t afford a $250k house?

+1

I don't understand the relationship between this and the post. The post clearly states a situation where they are living below their means and have saved $50,000 or have the ability to do so.

So they can save a measly $50,000 and afford the cashflow on a mortgage regardless of 5% down or 20% down.

[Jags4186]

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.

If your rent is $1000/mo and the refrigerator goes, you still pay $1000 that month. If you get an invasion of ants and the exterminator needs to come, you still pay $1000 that month. It’s freezing outside and a pipe bursts? Inconvenient yes, but still $1000 for the month. And if all 3 of those happen at the same time? You still pay $1000 that month.

If you can’t save a measly $50k then maybe you can’t afford a $250k house?

+1

I don't understand the relationship between this and the post. The post clearly states a situation where they are living below their means and have saved $50,000 or have the ability to do so.

So they can save a measly $50,000 and afford the cashflow on a mortgage regardless of 5% down or 20% down.

Reread the OPs post. He does not say “clearly state a situation where they are LBYMs”. He made two posits:

1) “there’s a good chance that 37.5k could take another 2 years to save up for.” In other words, put down 12.5k or 5% because it would take me 2 years to save another 15%. That’s 2 years of saving $1562.50 a month. I would say if you have the discipline to save $1562.50 for two years you’ve demonstrated the discipline of LBYM. Assuming average earners, it’s easy to say you can save that, but it’s much harder to do it consistently, month after month. What happens if after 2 years you only really saved $20k? Well then maybe you have expenses you didn’t consider. Household budgets are difficult to project far out—especially for young couples/families.

2) “I got a nice inheritance so I can afford the 50k down payment”. That’s great but this to me screams spending money the second you get your hands on money.

I’m not necessarily against putting down less than 20% I’m sure you could make a case for it in certain situations. But I am against telling people you should put down 5% because saving 20% takes too long or that buying a house as soon as possible is a wise thing. Over very long periods of time we are somewhat certain about how markets perform. But we don’t live our lives over an average of long periods of time. We live in the immediate now. Does it matter that the S&P500 returns 10% over a 30 year period if in a 2 year period in there it goes down 50% right when you bought a house, and lost your job, and can’t make the mortgage payments?

[sunny_socal]

Maybe OP is a single person? When I was single I never considered buying a house or saving up for a down payment. I was an apartment dweller.

When I got married we suddenly had two incomes. It took us about a year to save up the down payment since we just saved all my wife's income. *Poof*! We had a house (Saved up that $50k in one year)

[neophyte1]

OP here, and everyone, again, I didn't write my post. It's copied from another site on the internet from a post by a person I do not know. I just thought they made some interesting points and was curious what those here thought.

I have the money to do both a minimal down payment and also 20% (if and when I eventually buy), and as such, I simply created this post to spark conversation in regard to which way to go.

[mbasherp]

I put down 15% with PMI on my first home. I could've waited and done 20%, but observed that the market was moving up as quickly as I was saving. I was correct; the area appreciated over 10% in my first year of ownership. Now, 5% down would've resulted in a 30 year monthly payment that I wasn't as comfortable with. So perhaps there's an optimal use of cash as far as investing goes, but also an optimal amount of personal leverage as far as our own future. 20% down and "PMI is the devil" isn't a one size fits all solution, but the danger of the larger home that 5% down lets the average person buy is very real if they are unable to accurately measure their future payment ability.

[Jags4186]

OP here, and everyone, again, I didn't write my post. It's copied from another site on the internet from a post by a person I do not know. I just thought they made some interesting points and was curious what those here thought.

I have the money to do both a minimal down payment and also 20% (if and when I eventually buy), and as such, I simply created this post to spark conversation in regard to which way to go.

I know you didn’t write the content but its easier to say OP than “the reddit quoted content in the OP’s post”.

You can do whatever you want, I would look holistically at what you have, what you’re buying and decide what works best for you and your family. The content you provided is slanted towards people who seem to be stretching for the first home, not coming at it from a mathematical standpoint—although it tries to present itself as a mathematical standpoint.

[JBTX]

The premise is over the long run borrowing to buy a home has been a positive investment, and stock returns typically exceed mortgage rates, thus why not max out borrowing when buying a house?

From a pure numbers stand point on average it may be true. But as others have pointed out there is risk in that strategy and there will be times when that doesn't work out.

One thing I don't think the OP took into account is you may be paying a higher interest rate on the entire mortgage by going 5% down. That would change the calc significantly.

A better way to look at it is if you got a primary 80% mortgage and a supplemental home equity loan for the additional 15%. The home equity loan rate will be higher than the base mortgage rate.

I don't necessarily buy into the proposition that buying a home is a great investment. It is a lifestyle choice. It is probably true that buying a home is more economically advantageous than leasing a comparable home. But many people go from a smaller rental and upgrade size and sq footage of house when they buy, at which point there will be a lot of additional expenditures on furniture and other home related sundries.

[LiterallyIronic]

For me, it was about cash flow. I wanted my mortgage (PITI) to be no more than $800/month. That couldn't even happen on 20% down, so we had to go to 29%. On my current salary, I probably could swing the mortgage with 5% down and thrown the rest of what would've been down payment into retirement. But what happens if my current salary doesn't remain my future salary? What if my income drops from $60k to $20k?

In that scenario, I could still manage a mortgage of $800, but not $1,600. To that, you'd probably say, "Just liquidate from your retirement." And in response I'd declare that the mortgage plays second fiddle to retirement, not the other way around. Money that goes into retirement funds needs to stay there. If there are extra dollars after paying the mortgage, throwing more into retirement is more important than throwing more at mortgage principal. So taking money out of retirement funding to bankroll the mortgage is unacceptable - my mortgage has to be low enough that I can pay it in any circumstance without mucking with retirement money.

A lower down payment to invest in the stock market is essentially the same thing as taking out an HELOC and investing it. And I wouldn't do that.

[coupleofcents]

My critique:

1. You will usually get a better rate by putting 20% down than 5%. This would make a difference over 30 years in addition to not paying the mortgage insurance.

[DVMResident]

"I'll piggyback with this about PMI and why I prefer 5% down. (Conventional only.)

• 1. Housing prices are usually rising. Unless you think you can time a collapse, which are rare, you will pay more for your house in 2 years than you would now. I'll be using 250k/5% rate as my baseline housing price throughout this post. Putting 5% down costs you 12,500...
  
  There is a fair point here. Home tend to increase in price overtime and even nominal increases produce a good ROI when leverage.
  If a house increases +0 real/2% nominal on a 5% down payment, that's a 40% (on a nominal linear basis, before costs/taxes) increase the first year. Can't beat that. US single family homes have averaged a +1% over CPI since WWII, YMMV obviously.
  
  ...Putting 20% down costs you 50,000. If you're buying in the 250k range there's a good chance that 37.5k could take another 2 years to save up for. At average growth rates in an average state, you're paying another 20k for that home in 2 years. Sweet, you saved 9-10k in MI payments and tacked on an additional 20k in PI. You might say that you pay less interest if you wait 2 years because you are financing less, even at the higher price. This is true, but if you really want to do that you just make curtailments every month with money you would have otherwise been saving for 20% down. Now you have the lower UPB, pay less interest, and payoff sooner. This vastly outweights that piddly MI.
  
  The math is reasonable, but ignores the behavioral aspect. People tend to stretch and will use the 5% down to put themselves in a bad spot and exposed to market gyrations if they need to sell. If the purchase is prudent on a conservative budget and they owner really intends to stay in the home for 30 years, yeah, okay, getting a 2 year head start on 5% even with MI start isn't bad.
  
  2. Well Sardines, I got a nice inheritance so I can actually afford the 50k down payment, I should do it now right? Not if you don't need to! Financing at 5% means you pay 170k in interest life of loan and probably 9-10k in MI depending on the state. 180k of "wasted" money (ignoring tax goodness.) At 20% down you pay 143k in interest and 0 MI. Sweet, you saved 37k over 30 years. DO YOU KNOW HOW BAD THAT IS? If you put 37.5k into the market and got annual returns of 4% (bad) you'd make 80k in that same time frame. 80k > 37k. Also, you have access to that money, whereas if it's just in equity it's tougher to tap into. With average S&P returns you'd make over 150k more putting it into the market than your down payment.
  
  The reality is the average mortgage rarely lasts the full duration. First time single family home buyers sell an average after 10 years and second/higher time buyer is 13 years. Condos are are 5 and 8 years, respectively. Thus, the PMI and extra interest get compressed into less years and the chance that equities will outperform (should) decreases.
  
  Also taxes: can't ignore tax benefits of a mortgage (which are over stated, but still something) and capital gains of investment returns. Neither tax is particularly high, but move in opposite directions and leave a decent spread. Maybe mid-20%, but will vary greatly between families.
  
  But, again, if the home owner really keep the mortgage for 30 years, a rare event, this argument holds more weight. As written, the arguement has no bearing for the vast majority of home owners.
  
  3. What if another collapse happens? Well there's 2 scenarios. You keep your job and can wait it out, so your equity is irrelevant. What if you can't afford the house though? A lot of markets dropped 50% in the last collapse. Whether you put 5% or 20% down, most borrowers will be underwater. Do you want to lose 12.5k or 50k? Also! Guess what, we have our S&P investments. It sucks that it's likely down quite a bit, but if you can cash out and make your payments, you keep your home, which will someday get value back. Or you walk away from the home and still have money in the stock market. These are the biggies. Really, the only upside of putting 20% down is a lower monthly payment, but if the change in monthly payment from 5% to 20% impacts your ability to pay, you are buying outside of your means as it is. I guess if your credit is bad you'd need the 20%, but most people with bad credit aren't saving enough to put 20% down on a house. (Barring inheritance.)
  
  I tend to agree with this. This been a lot of "mortgage pay down vs invest" threads. I'm in the 'invest' camp to create generalized and dynamic collateral rather paying down low-interest, illiquid assets. But many BH are very debt adverse and mortgage pay down is generally considered a good thing and leverage is bad (even when dirt cheap and collateralized). Both tactics yield directly correct results, so I think it comes down to personal call.
  
  4. So how did this myth start? Well it didn't used to be a myth. Interest rates used to be insane. I still see thousands of borrowers in the low 10s. Remember that 37k we "saved" earlier by putting down 20%? At a 7% interest rate that number is closer to 75k. At a 10% rate it's over 100k saved. Also, we're looking at a 70% payment different instead of a 20% one. Putting down 20% was good advice in times of high rates, but it's pointless now.

Minor nitpick: the rates are less important than spread between interest rates and excepted returns of your AA, adjusted for taxes and costs.

TL;DR- Low rates and a thing called the stock market makes 20% down a bad idea these days.
Source: I get paid to figure this stuff out."

To summarize, the math is mostly on point assuming people hold mortgages for 30 years. They do not:


This works on paper better than real life.

That said, I hold a similar view as the writer: large mortgages collateralized by both a house and giant pile of investments is often yields superior returns to traditional put 20% down AND is less risky. However, to be less risky, you have to be able to LBYM and continue to save/invest. The common mistake people make is using the larger mortgage afforded by <20% down to buy bigger houses and no longer able LBYM (based on the assumption they have a stable income).

I also think home ownership is more often than not a bad deal, but that's another story.

[Slacker]

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.

If your rent is $1000/mo and the refrigerator goes, you still pay $1000 that month. If you get an invasion of ants and the exterminator needs to come, you still pay $1000 that month. It’s freezing outside and a pipe bursts? Inconvenient yes, but still $1000 for the month. And if all 3 of those happen at the same time? You still pay $1000 that month.

If you can’t save a measly $50k then maybe you can’t afford a $250k house?

What landlord pays for extermination? I'm ready to move to a new place and I'd gladly move into a home with such a magnanimous landlord.

I certainly don't pay for extermination at my rental properties.

[neophyte1]

Does anyone know if conventional mortgage interest rates are always better with the more you put down? As in, if you put down 5%, will your rate be worse than if you put down 20%? I believe so. What about 15% instead of 20%? Just curious if there's a percentage where it plateaus. Would be a helpful determinant.

[LiterallyIronic]

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.

If your rent is $1000/mo and the refrigerator goes, you still pay $1000 that month. If you get an invasion of ants and the exterminator needs to come, you still pay $1000 that month. It’s freezing outside and a pipe bursts? Inconvenient yes, but still $1000 for the month. And if all 3 of those happen at the same time? You still pay $1000 that month.

If you can’t save a measly $50k then maybe you can’t afford a $250k house?

What landlord pays for extermination? I'm ready to move to a new place and I'd gladly move into a home with such a magnanimous landlord.

I certainly don't pay for extermination at my rental properties.

I would always expect the landlord to take care of that. "Hey, we need someone to come spray around the property - we've got ants coming in somewhere." I'd call and say that every day, if necessary. As a renter, it's not my responsibility to pay someone to come spray the property. Heck, I'd argue that it's the landlord's responsibility to provide replacement lightbulbs - unless you want me taking them with me when I leave.

Does anyone know if conventional mortgage interest rates are always better with the more you put down? As in, if you put down 5%, will your rate be worse than if you put down 20%? I believe so. What about 15% instead of 20%? Just curious if there's a percentage where it plateaus. Would be a helpful determinant.

For the mortgage we just got, yes. We got a better rate with more down. It plateaued at 25%. That is to say, we wouldn't've got a better rate at 30% down than the 29% we actually put down. 25%+ came with the best rate Wells Fargo offered. This is at least the case for prime borrowers (740+ credit rating).

[AlarmFuerCobra11]

I never had a landlord that didn't pay for extermination as long as it was clear it wasn't because you were living dirty and inviting them in.

Our first SFH that we rented, the landlords had just replaced the entire front carpentry on the house. Carpenter ants had a massive nest in it and gutted it from the inside. Let me tell you what, they told us to be on the phone in negative 5 seconds if we saw any sign of them back and yes, they were paying for it.

[Admiral]

Does anyone know if conventional mortgage interest rates are always better with the more you put down? As in, if you put down 5%, will your rate be worse than if you put down 20%? I believe so. What about 15% instead of 20%? Just curious if there's a percentage where it plateaus. Would be a helpful determinant.

Yes, because the more equity you have, the less of a credit risk you are (lower risk of default). Same with assets, the more you have, the less risk to the lender.

[Admiral]

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.

If your rent is $1000/mo and the refrigerator goes, you still pay $1000 that month. If you get an invasion of ants and the exterminator needs to come, you still pay $1000 that month. It’s freezing outside and a pipe bursts? Inconvenient yes, but still $1000 for the month. And if all 3 of those happen at the same time? You still pay $1000 that month.

If you can’t save a measly $50k then maybe you can’t afford a $250k house?

What landlord pays for extermination? I'm ready to move to a new place and I'd gladly move into a home with such a magnanimous landlord.

I certainly don't pay for extermination at my rental properties.

Hence, your screen name...

[Jags4186]

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.

If your rent is $1000/mo and the refrigerator goes, you still pay $1000 that month. If you get an invasion of ants and the exterminator needs to come, you still pay $1000 that month. It’s freezing outside and a pipe bursts? Inconvenient yes, but still $1000 for the month. And if all 3 of those happen at the same time? You still pay $1000 that month.

If you can’t save a measly $50k then maybe you can’t afford a $250k house?

What landlord pays for extermination? I'm ready to move to a new place and I'd gladly move into a home with such a magnanimous landlord.

I certainly don't pay for extermination at my rental properties.

Every landlord I've ever had pays for extermination. Where I live now on the first hot day of the year we always get ants in the kitchen. This last year they sent someone without me even having to call.

When my wife and I were just dating she was living in a not so nice apartment complex and she had mice. She had complained to the landlord several times and he didn't do anything. One call to the municipal board of health and the next day there was an exterminator there.

One things for sure, if you were my landlord and I had an infestation that wasn't because I'm a pig and you didn't deal with it, you wouldn't be getting rent checks and I would be so far up the townships behind your head would spin.

[Slacker]

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.

If your rent is $1000/mo and the refrigerator goes, you still pay $1000 that month. If you get an invasion of ants and the exterminator needs to come, you still pay $1000 that month. It’s freezing outside and a pipe bursts? Inconvenient yes, but still $1000 for the month. And if all 3 of those happen at the same time? You still pay $1000 that month.

If you can’t save a measly $50k then maybe you can’t afford a $250k house?

What landlord pays for extermination? I'm ready to move to a new place and I'd gladly move into a home with such a magnanimous landlord.

I certainly don't pay for extermination at my rental properties.

Every landlord I've ever had pays for extermination. Where I live now on the first hot day of the year we always get ants in the kitchen. This last year they sent someone without me even having to call.

When my wife and I were just dating she was living in a not so nice apartment complex and she had mice. She had complained to the landlord several times and he didn't do anything. One call to the municipal board of health and the next day there was an exterminator there.

One things for sure, if you were my landlord and I had an infestation that wasn't because I'm a pig and you didn't deal with it, you wouldn't be getting rent checks and I would be so far up the townships behind your head would spin.

The lease where I live as a tenant says this:

11. MAINTENANCE AND REPAIR; RULES. For consideration given, which is
hereby acknowledged, in accordance with A.R.S. § 331324(
C), Tenant will, at its
sole expense, keep and maintain the Premises and appurtenances in good and
sanitary condition and repair during the term of this Agreement and any renewal
thereof. This shall include: furnace filter replacement, clogged sinks & toilets, as
well as pest control. In the event maintenance is requested to be completed by
Tenant and required per your lease, the work must be completed within 5 or 10
days. Without limiting the generality of the foregoing, Tenant shall:

[runner540]

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.

If your rent is $1000/mo and the refrigerator goes, you still pay $1000 that month. If you get an invasion of ants and the exterminator needs to come, you still pay $1000 that month. It’s freezing outside and a pipe bursts? Inconvenient yes, but still $1000 for the month. And if all 3 of those happen at the same time? You still pay $1000 that month.

If you can’t save a measly $50k then maybe you can’t afford a $250k house?

What landlord pays for extermination? I'm ready to move to a new place and I'd gladly move into a home with such a magnanimous landlord.

I certainly don't pay for extermination at my rental properties.

Every landlord I've ever had pays for extermination. Where I live now on the first hot day of the year we always get ants in the kitchen. This last year they sent someone without me even having to call.

When my wife and I were just dating she was living in a not so nice apartment complex and she had mice. She had complained to the landlord several times and he didn't do anything. One call to the municipal board of health and the next day there was an exterminator there.

One things for sure, if you were my landlord and I had an infestation that wasn't because I'm a pig and you didn't deal with it, you wouldn't be getting rent checks and I would be so far up the townships behind your head would spin.

+1
Our current landlord also pays for regular treatment with unlimited interim visits if needed. And landscaping. And a home warranty for repairs. I like this set up and pay our rent early every month.

[Slacker]

Clearly, I misunderstood the comment to which I was replying. I was thinking in terms of regular pest control on a bi-monthly or quarterly basis when the person I responded to was discussing taking care of an infestation.

Our properties are managed by a local small business property manager with a great reputation who should be doing all that is necessary. At this point, we have not had to pay for any extermination services and haven't had any complaints of infestations that I know of. I took this opportunity to educate myself and make sure that I understand that any threat to health, damage to structure and habitability (due to infestation or other causes) are definitely the responsibility of the landlord.

I should have been demanding my own landlord take care of our scorpion problems rather than spraying around the house on my own.

Please don't let me push this off topic any further! I apologize for skewing the conversation into disparate topics and I thank the responders for pushing me to make sure I understand my responsibilities as a landlord.

[jadd806]

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.
...
If you can’t save a measly $50k then maybe you can’t afford a $250k house?

What if they LBYM but their money is stashed away in tax-advantaged accounts? It's really too bad that lenders don't consider the whole financial picture.

[Jags4186]

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.
...
If you can’t save a measly $50k then maybe you can’t afford a $250k house?

What if they LBYM but their money is stashed away in tax-advantaged accounts? It's really too bad that lenders don't consider the whole financial picture.

They’re spending all of their take home pay if they can’t save the down payment. If they’re spending all their take home pay while renting they likely can’t afford a home unless they’re in a rare place where home ownership is significantly less than renting.

I think everyone needs to make their own choices. The answer to everything leverage related cannot be "borrow for little or nothing and invest the rest". It isn't a sustainable path IMO. Sure you can selectively do that, but as with most things, you need a balance.

[Slacker]

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.
...
If you can’t save a measly $50k then maybe you can’t afford a $250k house?

What if they LBYM but their money is stashed away in tax-advantaged accounts? It's really too bad that lenders don't consider the whole financial picture.

If we are talking about someone maxing or near maxing their retirement accounts, I would suggest that if homeownership is a high priority goal that they decrease the funds going to retirement (but always get the full match!) and direct funds towards a savings account for a downpayment. Even better if they can get the full match, max their Roth and still save for a downpayment, but this will depend on the individual's priorities, expenses and income.

[jadd806]

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.
...
If you can’t save a measly $50k then maybe you can’t afford a $250k house?

What if they LBYM but their money is stashed away in tax-advantaged accounts? It's really too bad that lenders don't consider the whole financial picture.

They’re spending all of their take home pay if they can’t save the down payment. If they’re spending all their take home pay while renting they likely can’t afford a home unless they’re in a rare place where home ownership is significantly less than renting.

I think everyone needs to make their own choices. The answer to everything leverage related cannot be "borrow for little or nothing and invest the rest". It isn't a sustainable path IMO. Sure you can selectively do that, but as with most things, you need a balance.

Should have been more specific. I was talking about someone who maxes their retirement accounts every year. They clearly save a respectable amount of money, it just isn't liquid.

The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.
...
If you can’t save a measly $50k then maybe you can’t afford a $250k house?

What if they LBYM but their money is stashed away in tax-advantaged accounts? It's really too bad that lenders don't consider the whole financial picture.

If we are talking about someone maxing or near maxing their retirement accounts, I would suggest that if homeownership is a high priority goal that they decrease the funds going to retirement (but always get the full match!) and direct funds towards a savings account for a downpayment. Even better if they can get the full match, max their Roth and still save for a downpayment, but this will depend on the individual's priorities, expenses and income.

Yeah, that is what I was going for. I am in this situation. I am 24 years old and home ownership is not a high priority goal for me at the moment. I am maxing out my TSP and IRA. That only leaves a few hundred dollars of excess to divert to savings every month.

I don't particularly want to own a house, but I also don't want to get priced out of the area that I live in (495 corridor in Massachusetts). It's not as crazy as Boston, but home prices and rent seem to be climbing at astonishing rates here. We're paying nearly 20% more for rent than we were 2 years ago. Based on this, I find myself wondering if I should reduce my retirement contributions and start saving cash in order to hedge against the real estate market in my area.

[neophyte1]

Does anyone know if conventional mortgage interest rates are always better with the more you put down? As in, if you put down 5%, will your rate be worse than if you put down 20%? I believe so. What about 15% instead of 20%? Just curious if there's a percentage where it plateaus. Would be a helpful determinant.

Spoke with my loan officer, and he said the mortgage interest rate is identical no matter what you put down, assuming you have a 740+ credit score, which I do. So the only difference then is no PMI at 20% down, but 20% down does NOT have the benefit of a better interest rate.

[Jags4186]

Does anyone know if conventional mortgage interest rates are always better with the more you put down? As in, if you put down 5%, will your rate be worse than if you put down 20%? I believe so. What about 15% instead of 20%? Just curious if there's a percentage where it plateaus. Would be a helpful determinant.

Spoke with my loan officer, and he said the mortgage interest rate is identical no matter what you put down, assuming you have a 740+ credit score, which I do. So the only difference then is no PMI at 20% down, but 20% down does NOT have the benefit of a better interest rate.

What bank? What rate? What a amount and term?

[dsmil]

Does anyone know if conventional mortgage interest rates are always better with the more you put down? As in, if you put down 5%, will your rate be worse than if you put down 20%? I believe so. What about 15% instead of 20%? Just curious if there's a percentage where it plateaus. Would be a helpful determinant.

Spoke with my loan officer, and he said the mortgage interest rate is identical no matter what you put down, assuming you have a 740+ credit score, which I do. So the only difference then is no PMI at 20% down, but 20% down does NOT have the benefit of a better interest rate.

I'm going through the process and am finding the same thing. Rates have been 3.5-3.625 lately and it doesn't matter what I put down, as long as it's a conforming loan (<$424,100). The PMI premiums are .19% for 15% down, .3% for 10% down, and .41% for 5% down.

[Admiral]

Does anyone know if conventional mortgage interest rates are always better with the more you put down? As in, if you put down 5%, will your rate be worse than if you put down 20%? I believe so. What about 15% instead of 20%? Just curious if there's a percentage where it plateaus. Would be a helpful determinant.

Spoke with my loan officer, and he said the mortgage interest rate is identical no matter what you put down, assuming you have a 740+ credit score, which I do. So the only difference then is no PMI at 20% down, but 20% down does NOT have the benefit of a better interest rate.

I'm going through the process and am finding the same thing. Rates have been 3.5-3.625 lately and it doesn't matter what I put down, as long as it's a conforming loan (<$424,100). The PMI premiums are .19% for 15% down, .3% for 10% down, and .41% for 5% down.

This is surprising to me. Perhaps things have changed since I last bought a house (2003), though I have refinanced quite a few times.

[Admiral]

..
Yeah, that is what I was going for. I am in this situation. I am 24 years old and home ownership is not a high priority goal for me at the moment. I am maxing out my TSP and IRA. That only leaves a few hundred dollars of excess to divert to savings every month.

I don't particularly want to own a house, but I also don't want to get priced out of the area that I live in (495 corridor in Massachusetts). It's not as crazy as Boston, but home prices and rent seem to be climbing at astonishing rates here. We're paying nearly 20% more for rent than we were 2 years ago. Based on this, I find myself wondering if I should reduce my retirement contributions and start saving cash in order to hedge against the real estate market in my area.

And thus you are seeing one of the key benefits of ownership: cost control. Another one is inflation protection (and they are not the same, since rents can rise beyond inflation). A third is forced savings (the principal you pay down each month). A fourth is that ownership is subsidized by the gov't (mortgage interest deduction).

Owning is not for everyone, but provided your circumstances (job security) warrant it, and you can afford it, the first two benefits listed above ALONE are enough to tilt the scales in favor of owning over renting, IMO.

There are certainly some outliers who can afford to buy but would rather rent and invest the money, and hope they come out ahead. But in my view most people who can afford to buy--and whose circumstances warrant it--usually buy. I'd rather put my money (and it's a lot of money) toward something that I can eventually sell than in some landlord's pocket. For me, it's that simple.

I would def start saving for a home after you've contributed enough to get a match, if applicable.

[Slacker]

..
Yeah, that is what I was going for. I am in this situation. I am 24 years old and home ownership is not a high priority goal for me at the moment. I am maxing out my TSP and IRA. That only leaves a few hundred dollars of excess to divert to savings every month.

I don't particularly want to own a house, but I also don't want to get priced out of the area that I live in (495 corridor in Massachusetts). It's not as crazy as Boston, but home prices and rent seem to be climbing at astonishing rates here. We're paying nearly 20% more for rent than we were 2 years ago. Based on this, I find myself wondering if I should reduce my retirement contributions and start saving cash in order to hedge against the real estate market in my area.

And thus you are seeing one of the key benefits of ownership: cost control. Another one is inflation protection (and they are not the same, since rents can rise beyond inflation). A third is forced savings (the principal you pay down each month). A fourth is that ownership is subsidized by the gov't (mortgage interest deduction).

Owning is not for everyone, but provided your circumstances (job security) warrant it, and you can afford it, the first two benefits listed above ALONE are enough to tilt the scales in favor of owning over renting, IMO.

There are certainly some outliers who can afford to buy but would rather rent and invest the money, and hope they come out ahead. But in my view most people who can afford to buy--and whose circumstances warrant it--usually buy. I'd rather put my money (and it's a lot of money) toward something that I can eventually sell than in some landlord's pocket. For me, it's that simple.

I would def start saving for a home after you've contributed enough to get a match, if applicable.

You also have to consider how long you will be in the specific location where the house is purchased which I believe will likely be the controlling factor.

Just using some estimates of expectations and actual rent and house price numbers I determined that where we live requires a minimum stay of 38 months to come out ahead as purchasers on average once all costs are accounted. Since we won't be here that long, we rent even though a rent vs buy calculator would probably tell us to buy if it only goes off of home prices and rents collected. One factor that is in our favor is that we locked in our rental rate for 36 months so it would skew my estimates by probably one additional month since we don't have to worry about increasing rents.