Put more than 20% down on a house?

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gadoc
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Put more than 20% down on a house?

Post by gadoc » Sat Oct 20, 2018 11:08 am

We are looking to buy a house that is around 695,000. about 3800 sqft in a semi high cost of living town.

the price of the house is about 2x our income.

Option A would be If i were to put 20% down that would be 139,000. the break down would be as follows.
1. P&I 2817.
2. Property tax 667
3. HOI would be 150 a month

total would be 3633 for a 30 year fixed loan with a 4.5% interest rate

Option B would to put 29% which would be 200,000, the break down would be as follows

1. P&I would be 2508
2. Property tax 667
HOI: 150 a month

Total would be 3325 for 30% year fixed loan with a 4.5 interest

Questions:

1. Now that i'm typing it out i'm not sure if it evens makes a difference which option I pick. The difference is only 308. Am i thinking of this wrong? What would you do?

ThankYouJack
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Re: Put more than 20% down on a house?

Post by ThankYouJack » Sat Oct 20, 2018 12:04 pm

I personally would put more down, but it depends on your situation.

If you only put 20% down, what would you do with the extra $61,000?

And what is the chance you would need the extra liquidity due to job loss or another financial hardship?

gadoc
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Re: Put more than 20% down on a house?

Post by gadoc » Sat Oct 20, 2018 12:20 pm

I would invest it in my taxable account into a total stock market fund. Our jobs are both very stable so i'm not too concerned about job loss. Worst case scenario our families would help us.

ThankYouJack
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Re: Put more than 20% down on a house?

Post by ThankYouJack » Sat Oct 20, 2018 12:31 pm

gadoc wrote:
Sat Oct 20, 2018 12:20 pm
I would invest it in my taxable account into a total stock market fund. Our jobs are both very stable so i'm not too concerned about job loss. Worst case scenario our families would help us.
I would put more down then and work to become debt free faster. That's more of the conservative approach, but being debt free is a very nice feeling - viewtopic.php?t=97467

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bengal22
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Re: Put more than 20% down on a house?

Post by bengal22 » Sat Oct 20, 2018 12:32 pm

I always did 15 year loans.
"Earn All You Can; Give All You Can; Save All You Can." .... John Wesley

viz
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Re: Put more than 20% down on a house?

Post by viz » Sat Oct 20, 2018 12:46 pm

gadoc wrote:
Sat Oct 20, 2018 11:08 am
We are looking to buy a house that is around 695,000. about 3800 sqft in a semi high cost of living town.

the price of the house is about 2x our income.

Option A would be If i were to put 20% down that would be 139,000. the break down would be as follows.
1. P&I 2817.
2. Property tax 667
3. HOI would be 150 a month

total would be 3633 for a 30 year fixed loan with a 4.5% interest rate

Option B would to put 29% which would be 200,000, the break down would be as follows

1. P&I would be 2508
2. Property tax 667
HOI: 150 a month

Total would be 3325 for 30% year fixed loan with a 4.5 interest

Questions:

1. Now that i'm typing it out i'm not sure if it evens makes a difference which option I pick. The difference is only 308. Am i thinking of this wrong? What would you do?
In isolation, it is difficult to say.
1. Do you have an emergency fund?
2. Are you maxing out in the tax deferred/exempt space?
3. What is the your savings rate?
4. How old are you? How stable is your job?

If you answer yes for first 2 + save some in taxable and have some years to build your investment then pay the extra. The savings are on the total interest paid and peace of mind if you don't like debt. In this case, I would continue to pay the higher mortgage payment as your goal would be to reduce interest paid and peace of mind.

If you are okay with the debt then I would just invest the excess. Based on past results, you probably have a better rate of return.

RetiredAL
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Re: Put more than 20% down on a house?

Post by RetiredAL » Sat Oct 20, 2018 1:04 pm

29% is an odd number for a down-payment, so I suspect that is the point of consuming all of your savings.

The fallacy of of consuming all your savings to do that, is you are now 1 lost pay check, or one unexpected major expense away from disaster.

I'd opt for the lower down-payment keeping the difference in reserve. That $60,000 difference equates to 16 months of covering your payments if there is a job loss or illness/injury that prevents getting pay-checks, without jeopardizing your your home. It gives you time to work things out.

After buying, if you find you have extra money cash flow, then you can us that for extra payments that reduce the term of the loan.

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Re: Put more than 20% down on a house?

Post by Sandi_k » Sat Oct 20, 2018 1:04 pm

I'd put down 20%, and get a 15 year or 20 year mortgage. That will reduce interest paid substantially, while still allowing the additional downpayment funds to be invested and grow.

rgs92
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Re: Put more than 20% down on a house?

Post by rgs92 » Sat Oct 20, 2018 1:07 pm

Those are incredibly cheap taxes on a house that price. I would jump on this deal right away with 20% or any down payment you are comfortable with.
Whatever the P&I payment is almost does not matter since it's far offset by the low tax payment. I would die for taxes like that on house like that. I would even go for a better house if the taxes were a similar low rate.

Taxes here would be around $1400-$1800 a month on that house and they would be hiked 2-3% a year even if house values went down.

$3325/month for a total payment including homeowners for a (I am assuming nice) 3800sf house in a decent area and setting is great.
OMG, what a bargain. And I'm not even comparing it to crazy places like SF or LA, just modest fringe suburbs with older fair-condition houses in the NY exurbs where you have to drive everywhere and there is terrible mass transit into the city and there aren't many good jobs around anymore (they all went to the city).

Bottom line, go for it.
Last edited by rgs92 on Sat Oct 20, 2018 1:18 pm, edited 4 times in total.

NextMil
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Re: Put more than 20% down on a house?

Post by NextMil » Sat Oct 20, 2018 1:14 pm

Sandi_k wrote:
Sat Oct 20, 2018 1:04 pm
I'd put down 20%, and get a 15 year or 20 year mortgage. That will reduce interest paid substantially, while still allowing the additional downpayment funds to be invested and grow.
+1

ThankYouJack
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Re: Put more than 20% down on a house?

Post by ThankYouJack » Sat Oct 20, 2018 1:25 pm

NextMil wrote:
Sat Oct 20, 2018 1:14 pm
Sandi_k wrote:
Sat Oct 20, 2018 1:04 pm
I'd put down 20%, and get a 15 year or 20 year mortgage. That will reduce interest paid substantially, while still allowing the additional downpayment funds to be invested and grow.
+1
I wouldn't argue with that as long as the OP could still max out all tax advantage retirement accounts.

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Watty
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Re: Put more than 20% down on a house?

Post by Watty » Sat Oct 20, 2018 1:44 pm

gadoc wrote:
Sat Oct 20, 2018 11:08 am
1. Now that i'm typing it out i'm not sure if it evens makes a difference which option I pick. The difference is only 308. Am i thinking of this wrong? What would you do?
From your user ID I would assume that you are a doctor in Georgia and get paid enough that the extra money would just be invested in a taxable account and then taxed at a high rate. There were not a lot of other details but I would probably make the bigger down payment.

As other have said going with a 15 year mortage in order to get a lower interest rate might make sense.

If the 30 year mortage would not be paid off by the time you expect to retire then having a shorter mortage that would be paid off by then could make your retirement numbers work better.

If you have any younger kids than getting the mortage paid off by the time they start college could allow you to pay more of the college expenses out of your cash flow.

gadoc
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Re: Put more than 20% down on a house?

Post by gadoc » Sat Oct 20, 2018 2:05 pm

viz wrote:
Sat Oct 20, 2018 12:46 pm
gadoc wrote:
Sat Oct 20, 2018 11:08 am
We are looking to buy a house that is around 695,000. about 3800 sqft in a semi high cost of living town.

the price of the house is about 2x our income.

Option A would be If i were to put 20% down that would be 139,000. the break down would be as follows.
1. P&I 2817.
2. Property tax 667
3. HOI would be 150 a month

total would be 3633 for a 30 year fixed loan with a 4.5% interest rate

Option B would to put 29% which would be 200,000, the break down would be as follows

1. P&I would be 2508
2. Property tax 667
HOI: 150 a month

Total would be 3325 for 30% year fixed loan with a 4.5 interest

Questions:

1. Now that i'm typing it out i'm not sure if it evens makes a difference which option I pick. The difference is only 308. Am i thinking of this wrong? What would you do?
In isolation, it is difficult to say.
1. Do you have an emergency fund?
2. Are you maxing out in the tax deferred/exempt space?
3. What is the your savings rate?
4. How old are you? How stable is your job?

If you answer yes for first 2 + save some in taxable and have some years to build your investment then pay the extra. The savings are on the total interest paid and peace of mind if you don't like debt. In this case, I would continue to pay the higher mortgage payment as your goal would be to reduce interest paid and peace of mind.

If you are okay with the debt then I would just invest the excess. Based on past results, you probably have a better rate of return.

1. We do have an Emergency fund
2. We are maxing out all retirement accounts
3. we are in our early 30's with 2 kids. Job is very stable.

gadoc
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Re: Put more than 20% down on a house?

Post by gadoc » Sat Oct 20, 2018 2:06 pm

RetiredAL wrote:
Sat Oct 20, 2018 1:04 pm
29% is an odd number for a down-payment, so I suspect that is the point of consuming all of your savings.

The fallacy of of consuming all your savings to do that, is you are now 1 lost pay check, or one unexpected major expense away from disaster.

I'd opt for the lower down-payment keeping the difference in reserve. That $60,000 difference equates to 16 months of covering your payments if there is a job loss or illness/injury that prevents getting pay-checks, without jeopardizing your your home. It gives you time to work things out.

After buying, if you find you have extra money cash flow, then you can us that for extra payments that reduce the term of the loan.
Thank you for the response. I'm not sure why i put 29%. It would be 30%. Putting the 30% down payment would just be cash. We still have an emergency fund available. We would still be putting 3-5k a month into a taxable account after maxing out retirement accounts.

gadoc
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Re: Put more than 20% down on a house?

Post by gadoc » Sat Oct 20, 2018 2:08 pm

rgs92 wrote:
Sat Oct 20, 2018 1:07 pm
Those are incredibly cheap taxes on a house that price. I would jump on this deal right away with 20% or any down payment you are comfortable with.
Whatever the P&I payment is almost does not matter since it's far offset by the low tax payment. I would die for taxes like that on house like that. I would even go for a better house if the taxes were a similar low rate.

Taxes here would be around $1400-$1800 a month on that house and they would be hiked 2-3% a year even if house values went down.

$3325/month for a total payment including homeowners for a (I am assuming nice) 3800sf house in a decent area and setting is great.
OMG, what a bargain. And I'm not even comparing it to crazy places like SF or LA, just modest fringe suburbs with older fair-condition houses in the NY exurbs where you have to drive everywhere and there is terrible mass transit into the city and there aren't many good jobs around anymore (they all went to the city).

Bottom line, go for it.
I'm actually not sure if that would be my exact property tax that is due. Is there anyway to find out for a new build vs a 1-2 yr old house? Is this public record, if so where do I find it. 2k a month sounds insane for property tax but i'm assuming it would be that high in the bay area or manhattan.

LiterallyIronic
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Re: Put more than 20% down on a house?

Post by LiterallyIronic » Sat Oct 20, 2018 2:10 pm

We put 29% down. The bank offered slightly better terms for 25% down than 20% down, but there was no difference in terms at the 30% barrier, so we stopped at 29%.

Why 29% instead of 25%? Because that was the amount necessary to get our PITI down to $800.

This, of course, crushed our savings account down to about $35, but we still had our $6,000 emergency fund intact. We've since increased our emergency fund to $10,000.

gadoc
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Re: Put more than 20% down on a house?

Post by gadoc » Sat Oct 20, 2018 2:10 pm

I'm not sure I feel comfortable going with a 15 yr mortgage. That would be a pretty large monthly payment. I do plan on paying extra mortgage payments but I would like the flexibility of not having a large payment due every month.

Sandi_k
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Re: Put more than 20% down on a house?

Post by Sandi_k » Sat Oct 20, 2018 2:23 pm

gadoc wrote:
Sat Oct 20, 2018 2:10 pm
I'm not sure I feel comfortable going with a 15 yr mortgage. That would be a pretty large monthly payment. I do plan on paying extra mortgage payments but I would like the flexibility of not having a large payment due every month.
You can also get 20 year terms if you ask - for us, it was the sweet spot between paying loads of principal, not overpaying on interest, and maintaining a reasonable monthly payment.

mortfree
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Re: Put more than 20% down on a house?

Post by mortfree » Sat Oct 20, 2018 2:26 pm

Can you manage the property taxes and property insurance on your own instead of using an escrow account?

That would “reduce” your required monthly payment and you could save for these items on your own terms.

Ron
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Re: Put more than 20% down on a house?

Post by Ron » Sat Oct 20, 2018 3:05 pm

We were in our last home for 15 years (on a 25 year loan) and had it paid off before we had our current home built. Upon execution of the build contract, we put down just over 50% - the net proceeds from our last home.

We paid off our current home (30 year loan) in just 5.5 years, paying extra on our 6.875% note and "saving" over $125k in foregone interest (interest that did not have to be paid).

We were both age 46 when our current home was built but had a desire to enter retirement (forecast at age 65-66) mortgage/note free. Since we paid it off shortly before the turn of the century, we were able to put more money into the market just as the market was going south in 2000-02. That aided in moving up our planned retirement date by 6-7 years to age 59 for both of us. While I retired at age 59, my wife continued to work (her option) until age 64.

FWIW,

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Re: Put more than 20% down on a house?

Post by CppCoder » Sat Oct 20, 2018 4:09 pm

gadoc wrote:
Sat Oct 20, 2018 2:10 pm
I'm not sure I feel comfortable going with a 15 yr mortgage. That would be a pretty large monthly payment. I do plan on paying extra mortgage payments but I would like the flexibility of not having a large payment due every month.
If you could get a 15 year loan at 4%, it would add about $1300/month to your payment (20% down option). Up thread, you said that you max two retirement accounts and put 3-5k per month in taxable. That seems like plenty of extra slack to not fear the extra payment. Obviously, you can pay a 30 year loan in 15 years, but you'll pay the higher interest rate on the loan the whole time. On a $500k+ note, it adds up to a significant amount of money. Is the optionality of the smaller monthly payment worth a half-ish percent? I'd opt for the 15 and force the discipline. Regardless, I wouldn't wait too long to make the decision. Interest rates seem to be heading in the wrong direction for a buyer (said as if I actually know where interest rates are going tomorrow).

rgs92
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Re: Put more than 20% down on a house?

Post by rgs92 » Sat Oct 20, 2018 5:45 pm

In the Atlanta area, those property taxes are about right. I am familiar with them from house-searching.
So what you say sounds right on target. Taxes are rarely above $8,000 a year. The ATL is a great place to buy a house.

Ha ha, I'm thinking of moving to the ATL just for that reason, especially in retirement. (And there are nice tax breaks down the line for seniors who are getting up there in years.)

(Actually, Manhattan and SF are fairly cheap on property taxes. It's the NY Metro Suburbs that have killer taxes, like $20,000-$30,000 a year for far-from-mansion houses. In CA, Prop 13 limits taxes to 1% of the sales price, but if the sales price is $2 million, you have a hefty $20,000 tax bill. But that's a whole 'nother world).

So I repeat, IMHO you are doing great, and actually I would go with the 30-year even at 5% and invest more in a regular old 3-funder or 2-funder or VBIAX, vang. balanced index over time with any extra money.

(The nice 5% stock and bond pullback makes that tempting, but that's from a market timing standpoint, a big no-no here of course. But it could be worse you know.)

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Re: Put more than 20% down on a house?

Post by TropikThunder » Sat Oct 20, 2018 7:00 pm

gadoc wrote:
Sat Oct 20, 2018 2:08 pm
I'm actually not sure if that would be my exact property tax that is due. Is there anyway to find out for a new build vs a 1-2 yr old house? Is this public record, if so where do I find it. 2k a month sounds insane for property tax but i'm assuming it would be that high in the bay area or manhattan.
The tax rate will be public record, and you can find it at the county appraisers website. Another commenter suggested you live in Georgia, so I randomly chose a house for sale on Redfin in Decatur [3,500 sq ft 4/4 with a $699,000 selling price] and looked up it's address on the DeKalb county tax assessor website. According to that, the house appraised for $591,000 and had a 2018 tax bill of $10,766 [equivalent to $18.22 per $1,000 appraised value, or 1.822%]. So, the tax rates and tax bills for residences are public record, and you can look yours up (frankly, you can look anyone's up if you know the street address).

As for new construction, most likely you will catch a break there, how much depending on when during the year the county does it's tax appraisals. In my case, I closed on my house on Dec 22, 2017, but my taxes for 2018 had already been calculated based on the appraisal of unimproved land done in January of 2017 (Seattle area, my county does appraisals in January for the next year). So, my tax bill for 2018 was ~$600 rather than the $3,500 it will be for 2019 (land plus improvements i.e., structure). I still had to pay ~$300/month into escrow but it was refunded in April and just now.

ProfWengen
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Re: Put more than 20% down on a house?

Post by ProfWengen » Sat Oct 20, 2018 9:17 pm

I guess I'm the only one who puts the 5% minimum down... I've always thought putting the extra money into equities would have a higher expected value after 30yrs. I'll keep doing this as long as mortgage rates don't go above about 7%.

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unclescrooge
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Re: Put more than 20% down on a house?

Post by unclescrooge » Sat Oct 20, 2018 9:25 pm

With an income of $350k, you have little to none tax breaks.

Put down 5% if you can swing it.

OTOH, I live in Los Angeles where home prices are ridiculous. I put down just over 40% just so I'd be under the $1 million limit for tax deductions.

gadoc
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Re: Put more than 20% down on a house?

Post by gadoc » Sun Oct 21, 2018 9:11 am

Thank you all. So the impression im getting is to put less down? The difference I could invest. Another option would be to put less down and make a few extra payments throughout the years and then recast.

Psychologically only putting 20% down on a 650 house doesnt seem enough. We just payed off our student loans and it just seems wrong to go into so much debt again. The counter point would be the house is an appreciating asset and im still building up my savings, just a larger percent would be going towards the house as opposed to a taxable account.

Thank you again

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Re: Put more than 20% down on a house?

Post by grabiner » Sun Oct 21, 2018 12:16 pm

The way to look at this is to consider the return on your extra down payment, which is a fixed rate of 4.5%. Is that a good return? See Paying down loans versus investing

Given the size of the mortgage, any interest savings will be a lost tax deduction; the property tax and interest alone are well over $24,000, even before you consider other deductions such as charity. Therefore, you are getting a 4.5% taxable return, which is 3.42% after tax if you are in a 24% tax bracket, or 3.04% after tax if you are in a 32% tax bracket. (You also subtract GA state tax, but you will pay GA tax on any alternative investment, so that is a wash.)

And your 30-year mortgage has about an 11-year duration. That is, if you put more down, you would get back money every month for the next 30 years, and since the later payments are worth less in current dollars, the weighted average time to the payment is about 11 years. (If you chose a 15-year mortgage instead, that would have a 7-year duration.) 3,42% is about the market rate for an 11-year low-risk muni fund, and 3.04% is less; Vanguard Long-Term Tax-Exempt, with a 7-year duration, yields 3.21%.

Therefore, if you have any value for the liquidity, or even if you don't care about the liquidity but are in a 32% tax bracket, it makes more sense to put the minimum 20% down, whether you choose to invest the rest in munis or not.

If you have extra cash, and the bank will allow it (mortgage payment to income ratio), you might consider a 15-year mortgage, which will allow you to pay back the mortgage at a lower rate. If the 15-year mortgage is at 4%, the after-tax rates are 3.04% and 2.72%, with a 7-year duration, which makes it easier to see the reason that 7-year bonds are likely a better investment than a larger down payment.
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sergeant
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Re: Put more than 20% down on a house?

Post by sergeant » Sun Oct 21, 2018 2:56 pm

gadoc wrote:
Sat Oct 20, 2018 2:08 pm
rgs92 wrote:
Sat Oct 20, 2018 1:07 pm
Those are incredibly cheap taxes on a house that price. I would jump on this deal right away with 20% or any down payment you are comfortable with.
Whatever the P&I payment is almost does not matter since it's far offset by the low tax payment. I would die for taxes like that on house like that. I would even go for a better house if the taxes were a similar low rate.

Taxes here would be around $1400-$1800 a month on that house and they would be hiked 2-3% a year even if house values went down.

$3325/month for a total payment including homeowners for a (I am assuming nice) 3800sf house in a decent area and setting is great.
OMG, what a bargain. And I'm not even comparing it to crazy places like SF or LA, just modest fringe suburbs with older fair-condition houses in the NY exurbs where you have to drive everywhere and there is terrible mass transit into the city and there aren't many good jobs around anymore (they all went to the city).

Bottom line, go for it.
I'm actually not sure if that would be my exact property tax that is due. Is there anyway to find out for a new build vs a 1-2 yr old house? Is this public record, if so where do I find it. 2k a month sounds insane for property tax but i'm assuming it would be that high in the bay area or manhattan.
Or some of the areas in the Hill Country of Texas. California's property tax on homes is an absolute bargain compared to many areas.
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Re: Put more than 20% down on a house?

Post by SpaceCommander » Sun Oct 21, 2018 6:39 pm

Personally, I'm a big fan of the 100% down plan. If you have the means, I highly recommended it.
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Re: Put more than 20% down on a house?

Post by LeeMKE » Sun Oct 21, 2018 10:42 pm

Might be too late for OP, but others reading should know that you will cut the interest paid IN HALF (or more) by using a 15 year mortgage instead of a 30 year mortgage.

I would put 20% down, and take out a 15 year loan.
If already in a 30 year mortgage, pre-pay the bugger as aggressively as possible. Early pre-payments are worth way more than any legal investment.
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Re: Put more than 20% down on a house?

Post by lotusflower » Sun Oct 21, 2018 11:54 pm

gadoc wrote:
Sat Oct 20, 2018 2:10 pm
I'm not sure I feel comfortable going with a 15 yr mortgage. That would be a pretty large monthly payment. I do plan on paying extra mortgage payments but I would like the flexibility of not having a large payment due every month.
I see two different factors at play.
1) you can afford a $200k downpayment
2) you don't see a big deal between $2500/mo and $2800/mo.

I just checked bankrate.com and it looks like you can save about 0.7% with a 15-year fixed. Note that bankrate is quoting slightly higher rates than 4.5 on a 30, but we'll stay with your number for now, so maybe you can get a 15-year at 3.8%.

With $200k down, your 15-year/3.8% payment is $3612, which is "only" $800 more than your 2800 that you said you could afford. If you can swing that you will save tons of money. It's certainly a much bigger difference than anything else you've discussed.

For an illustration, take the $3612 payment, and decide between this 15-yr mortgage versus your 30-year mortgage, but then with the 30-year invest the payment difference in Total Stock Market and assume a 5% return. With the 15-year you will net about $3000 more per year.

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Re: Put more than 20% down on a house?

Post by Nowizard » Mon Oct 22, 2018 4:52 pm

Do you think investing an amount you withheld from the down payment would return more than the interest rate on the mortgage? If not, then put more down for the guaranteed return. This issue has changed since mortgage interest deductions are now limited in combination with state taxes. That, and the long, bull market would lead us to put more down even though we have not done so in the past when we had a choice.

Tim

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Re: Put more than 20% down on a house?

Post by Gemini » Mon Oct 22, 2018 5:18 pm

IMO, real estate (including home to live in) is a leverage play. I would not put more than 20% down unless you get better terms.

As far as 30yr vs 15yr loans, my suggestion would be to get the 30yr and pay it off in 15yrs.

lotusflower
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Re: Put more than 20% down on a house?

Post by lotusflower » Mon Oct 22, 2018 5:57 pm

Gemini wrote:
Mon Oct 22, 2018 5:18 pm
IMO, real estate (including home to live in) is a leverage play. I would not put more than 20% down unless you get better terms.

As far as 30yr vs 15yr loans, my suggestion would be to get the 30yr and pay it off in 15yrs.
If you get a 30-year and you pay it off in 15, the higher rate of the 30-year is like a policy rider buying you the privilege to make a lower payment. It's a great idea, but this rider will cost the OP about $3500 a year. All these BHers who aggressively pay off 30 year mortgages would have been way better off with 15-year notes, but not everyone can afford the risk of a higher payment, I know I couldn't since I was house poor for a long time. But if I were in OPs shoes (which is what they specifically asked) then I would definitely try to swing the 15-year.

OP said that he didn't want the higher payment but they also said that an extra $300 didn't seem to matter. Another $800 over that could make an enormous difference.

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