Purchasing New Home - Down Payment 20 or 25%??

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All_About_Benjis
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Joined: Tue Aug 15, 2017 10:28 am

Purchasing New Home - Down Payment 20 or 25%??

Post by All_About_Benjis » Tue Nov 13, 2018 8:53 am

We're set to close on a new home in a HCOL area in the next month or so. The house price is ~$655k, and we are considering putting down either 20 or 25 percent. In addition to the mortgage and taxes, we'll have an HOA payment of $200/month.

Some Details


I'm in late 30s; SO in early 30s
Current Incomes (both jobs stable): $125k (me); $140K+$50k bonus (SO)
Cash Savings: ~$225k (will be used for down payment)
Retirement Accounts: ~$500k (max out each year)
Taxable Accounts: ~$60k

We've been quoted interest rates of 4.875% for 20% down and 4.75% for 25% down.

I think we can afford to put 25% down, though it would make our emergency fund on the low end of what I would like. My question is what would make the most sense for us financially.

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simplesimon
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Location: Boston, MA

Re: Purchasing New Home - Down Payment 20 or 25%??

Post by simplesimon » Tue Nov 13, 2018 8:58 am

All_About_Benjis wrote:
Tue Nov 13, 2018 8:53 am
We're set to close on a new home in a HCOL area in the next month or so. The house price is ~$655k, and we are considering putting down either 20 or 25 percent. In addition to the mortgage and taxes, we'll have an HOA payment of $200/month.

Some Details


I'm in late 30s; SO in early 30s
Current Incomes (both jobs stable): $125k (me); $140K+$50k bonus (SO)
Cash Savings: ~$225k (will be used for down payment)
Retirement Accounts: ~$500k (max out each year)
Taxable Accounts: ~$60k

We've been quoted interest rates of 4.875% for 20% down and 4.75% for 25% down.

I think we can afford to put 25% down, though it would make our emergency fund on the low end of what I would like. My question is what would make the most sense for us financially.
What's your opportunity cost? Would the money just sit in cash otherwise? I would take the lower interest and build up the emergency fund over time.

SQRT
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Joined: Sat Feb 05, 2011 9:44 am

Re: Purchasing New Home - Down Payment 20 or 25%??

Post by SQRT » Tue Nov 13, 2018 8:59 am

Put down as much as you can while keeping sufficient liquidity.

delamer
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Re: Purchasing New Home - Down Payment 20 or 25%??

Post by delamer » Tue Nov 13, 2018 9:44 am

Liquidity tends to be underrated.

With only a 1/8th percentage point difference in interest rates, stick with 20% down.

Texanbybirth
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Re: Purchasing New Home - Down Payment 20 or 25%??

Post by Texanbybirth » Tue Nov 13, 2018 10:01 am

20%. This is one of those "if you have to ask, then you can't afford it", especially since you're talking about a 5% difference.

Keep your liquidity, and if you want to pay it toward the mortgage in a few years when y'all have settled in, then go for it.

wilked
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Re: Purchasing New Home - Down Payment 20 or 25%??

Post by wilked » Tue Nov 13, 2018 10:05 am

Texanbybirth wrote:
Tue Nov 13, 2018 10:01 am
20%. This is one of those "if you have to ask, then you can't afford it", especially since you're talking about a 5% difference.

Keep your liquidity, and if you want to pay it toward the mortgage in a few years when y'all have settled in, then go for it.
This is about it

Also, show me the homeowner who bought a house and didn't want to 'upgrade this' or 'change that'

Keep a few bucks for those projects

Trism
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Re: Purchasing New Home - Down Payment 20 or 25%??

Post by Trism » Tue Nov 13, 2018 10:18 am

In our zip code I see four places on Zillow Mortgage Rates to get 4.75% or less with 20% down on a $655,000 house.

Two of the 4.75% options have a total of $1 in lender+third party fees.

Shop little more, get a better rate, and keep your liquidity.

Thegame14
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Re: Purchasing New Home - Down Payment 20 or 25%??

Post by Thegame14 » Tue Nov 13, 2018 10:30 am

20% you will have lots of new expenses with a house, painting, furniture, maintenance, yard, sewer, gas, electric, water.... the bills just don't stop with a house.

adamthesmythe
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Re: Purchasing New Home - Down Payment 20 or 25%??

Post by adamthesmythe » Tue Nov 13, 2018 11:58 am

Flip a coin.

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Smorgasbord
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Re: Purchasing New Home - Down Payment 20 or 25%??

Post by Smorgasbord » Tue Nov 13, 2018 12:09 pm

I'd go with 20% as it keeps your cash cushion and is not too costly. Additionally, my hunch is that within the next few years you'll have an opportunity to refinance into a 30-year fixed in the 3.something range.

CurlyDave
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Re: Purchasing New Home - Down Payment 20 or 25%??

Post by CurlyDave » Tue Nov 13, 2018 12:44 pm

20% down. Keep your liquidity.

If there is some unexpected event in the next few years that money will come in handy. If you put 25% down, the bank will not let you skip a few mortgage payments, no matter how much you ask.

Oddball
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Re: Purchasing New Home - Down Payment 20 or 25%??

Post by Oddball » Tue Nov 13, 2018 1:13 pm

These are 30 years mortgages? Did you look into 15 year instead? What are the rates then?

All_About_Benjis
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Re: Purchasing New Home - Down Payment 20 or 25%??

Post by All_About_Benjis » Tue Nov 13, 2018 1:21 pm

simplesimon wrote:
Tue Nov 13, 2018 8:58 am

What's your opportunity cost? Would the money just sit in cash otherwise? I would take the lower interest and build up the emergency fund over time.
We would most likely move the cash to a short-term CD (Ally has an 11 month, penalty-free CD we've used before). Once we have a sufficient emergency fund, we'll continue to build up our taxable portfolio.

All_About_Benjis
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Joined: Tue Aug 15, 2017 10:28 am

Re: Purchasing New Home - Down Payment 20 or 25%??

Post by All_About_Benjis » Tue Nov 13, 2018 1:23 pm

Oddball wrote:
Tue Nov 13, 2018 1:13 pm
These are 30 years mortgages? Did you look into 15 year instead? What are the rates then?
These are 30 years. The 15 year rates aren't that much better, and the payment would be difficult for us to pay on just one salary.

JoeRetire
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Re: Purchasing New Home - Down Payment 20 or 25%??

Post by JoeRetire » Tue Nov 13, 2018 1:23 pm

All_About_Benjis wrote:
Tue Nov 13, 2018 8:53 am
We've been quoted interest rates of 4.875% for 20% down and 4.75% for 25% down.

I think we can afford to put 25% down, though it would make our emergency fund on the low end of what I would like. My question is what would make the most sense for us financially.
Go for the 20% down.

All_About_Benjis
Posts: 24
Joined: Tue Aug 15, 2017 10:28 am

Re: Purchasing New Home - Down Payment 20 or 25%??

Post by All_About_Benjis » Tue Nov 13, 2018 1:25 pm

Trism wrote:
Tue Nov 13, 2018 10:18 am
In our zip code I see four places on Zillow Mortgage Rates to get 4.75% or less with 20% down on a $655,000 house.

Two of the 4.75% options have a total of $1 in lender+third party fees.

Shop little more, get a better rate, and keep your liquidity.
This is a newly built home in a development community. If we use one of the developer's preferred lenders, we get $20k toward closing costs. Our plan is to go with one of the preferred and then refinance in a couple years (rate dependent).

But per your advice, I put in a request to Ally for a quote.

topcatin
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Joined: Tue Sep 15, 2015 6:58 am

Re: Purchasing New Home - Down Payment 20 or 25%??

Post by topcatin » Tue Nov 13, 2018 1:28 pm

We would have liked to put down 30% down but settled with 20%. Apart from this, it is good to have an additional $5000 - $10000 to take care of furnishing of the home but mainly repairs which may come up in the next 2-3 years. Being a new home, I doubt you will run into major repairs.

barnaclebob
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Re: Purchasing New Home - Down Payment 20 or 25%??

Post by barnaclebob » Tue Nov 13, 2018 1:44 pm

How long would it take you to save that 5% back up? With secure jobs and a high savings rate it can be safe to go down to low liquidity for a short time.

When I bought my first house with 20% down I was slightly concerned I might have to delay closing by two days so we could receive our paychecks and have enough cash to close.:shock: A year later we had a years worth of expenses in the bank and would barely have been able to afford the house on one salary anyway. I probably should have waited longer to buy (wanted the Obama bucks in 2009, $8k tax credit for those who don't remember) and wouldn't advise many people to do what we did but it can work out just fine.

Ben Mathew
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Re: Purchasing New Home - Down Payment 20 or 25%??

Post by Ben Mathew » Tue Nov 13, 2018 1:51 pm

If you plan to hang on to that mortgage for a long time (i.e. you stay in the same house and aren't planning to pay the mortgage down early), my instinct is to put 25% down and get the lower interest rate. As for emergency funds:

- You both have safe jobs.

- You will still have $225K-$164K=$61K cash after paying 25% down

- You have $60K in taxable you can dip into

The probability of losing both jobs and burning through $120K before one of you manages to land a new job seems very low.

ofckrupke
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Re: Purchasing New Home - Down Payment 20 or 25%??

Post by ofckrupke » Tue Nov 13, 2018 1:55 pm

you can't be sure that a refi will be attractive at any point in the future, but if this is not a forever home then the decision is colored by the expectation that recovery of the extra 33k principal commitment will be completed at sale, rather than gradually dribbled back as a component of the difference in monthly payments over the course of 30 years.

In the limiting case of selling (or for that matter, refinancing) the house after a year, you will get the extra DP principal back and will have paid about $2.2k less in interest. Putting aside the question of gain or loss on the house, that's a ~6.8% return on the investment of extra DP, pre-tax (not all of the interest will be deductible under TCJA, but the difference in interest paid between the two choices will be fully deductible in the early years).

For longer holding terms, the effective rate of return (on the extra DP w/lower interest rate) will be somewhat lower, because each year the difference in interest paid will decrease a little. This return rate will gradually sag down to around 6.4% (pre-tax) if you hold for the entire 30y term...at least, if my excel foo was not fubar.

Even an oversimplified linear interpolation of effective investment return between these bounding cases should help you decide whether it is a worthwhile bond-like investment for your circumstances, given your personal liquidity concerns, notions about likely term to sale or refi, and return expectations for fixed-income investment alternatives in your portfolio.

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