Down Payment Strategy

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socialforums2019
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Joined: Sun Aug 25, 2019 10:12 am

Down Payment Strategy

Post by socialforums2019 »

We are getting ready to make a home purchase and are trying to balance out a low enough mortgage to live comfortably while also being able to set ourselves up for retirement. We have the ability to put $1M down, but assuming we get a good interest rate (3-3.25%) we are thinking we put as little down as possible and invest the rest.

With our numbers, looking at homes in the 1.5-1.7 range, we are thinking a mortgage of $750K is enough. After the sale of our current house, that will allow us to invest between $700 - $900K into the market at our AA. In total, we would have around $1.0 - $1.1M in retirement (401K, Roth, Taxable) with $100K cash as our EF.

The only concern I have is this would leave us with ~$2k/mo in "savings" after paying off all bills.

Should the strategy be to put as little down as possible to minimize end of month "savings" to maximize the dollars invested or should we put a little more money down to grow that $2K/mo savings at the sacrifice of the $700-$900K investment into the market? With a $700K vs $900K investment now make a material difference in our retirement balance in 20 years? Ideally would like to retire around 55 - 57.
VoiceOfReason
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Re: Down Payment Strategy

Post by VoiceOfReason »

You will get many different opinions on this. It boils down to are you better paying off a mortgage or investing. I think it’s all about your comfort level.

I recently had to make this decision. I’m FiRE motivated on the principle of not needing, but choosing to work. As soon as possible our employers will not hold that power over us. Buying a house that required to incomes to carry was counter productive. For me it was somewhere in between. As a dual income house, I wanted to be able to comfortably manage our expenses if one of us lost our jobs. That was a big factor in determining how much to put down.
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JupiterJones
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Re: Down Payment Strategy

Post by JupiterJones »

socialforums2019 wrote: Tue Apr 06, 2021 6:45 am Should the strategy be to put as little down as possible to minimize end of month "savings" to maximize the dollars invested or should we put a little more money down to grow that $2K/mo savings at the sacrifice of the $700-$900K investment into the market?
There's also the third option to consider, which is putting more money down in order to be able to pay off the mortgage more quickly. As in your second scenario, the smaller resulting payment would enable you to bump up your "left over" money to something higher that $2,000, but you'd use that to pay extra on the (now smaller) mortgage rather than increase your monthly "savings". Once the mortgage is out of the way, you'll then be able to really shovel in savings and investments in very large amounts each month, which will at least partly make up for the "sacrifice" of missing the initial investment. (This assumes that, since your EF is fully-funded, you don't have any other savings goals. That may or may not be the case.)

Anyway, there is no broad consensus among we Bogleheads on any sort of "correct" strategy here.

Simple math will tell you that borrowing at, say, 3.25% in order to invest the same amount for a return higher than 3.25% is the strategy that theoretically optimizes total earnings. Of course, that ignores the fact that a down payment is a risk-free way to "earn" 3.25%, whereas the higher-rate investment is certainly not. If you compared risk-adjusted returns, it may not be such a slam-dunk. And besides, "total earnings" might not always be the thing you want to optimize.

For me, I go with the simple, old psychological trick of imagining that I already owned the home free-and-clear. Would I borrow money against it, signing myself up for monthly payments and all that, in order to invest that money elsewhere? Any time you have a chunk of money and decide to invest it instead of pay down a mortgage (via large down payment or extra principle payments), that's basically what you're doing.
Stay on target...
KlangFool
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Re: Down Payment Strategy

Post by KlangFool »

OP,

Are you from California or one of the states with non-recourse loan? If yes, you should put as little money down as possible. If the housing market crashes, you can walk away from the house and the mortgage. You may even want to look at interest-only mortgage.

You would make money if the house's value goes up. And, you are protected on the down size. In the worst case, you only lose the home equity.

KlangFool
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jarjarM
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Re: Down Payment Strategy

Post by jarjarM »

KlangFool wrote: Tue Apr 06, 2021 11:39 am OP,

Are you from California or one of the states with non-recourse loan? If yes, you should put as little money down as possible. If the housing market crashes, you can walk away from the house and the mortgage. You may even want to look at interest-only mortgage.

You would make money if the house's value goes up. And, you are protected on the down size. In the worst case, you only lose the home equity.

KlangFool
Second this. If you're in CA with non-recourse loan. Put down 20% and invest the rest. May even go with an ARM or I/O to lower the interest rate, though that will depend on your risk tolerance and your view on future interest rate.
Topic Author
socialforums2019
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Re: Down Payment Strategy

Post by socialforums2019 »

jarjarM wrote: Tue Apr 06, 2021 12:01 pm
KlangFool wrote: Tue Apr 06, 2021 11:39 am OP,

Are you from California or one of the states with non-recourse loan? If yes, you should put as little money down as possible. If the housing market crashes, you can walk away from the house and the mortgage. You may even want to look at interest-only mortgage.

You would make money if the house's value goes up. And, you are protected on the down size. In the worst case, you only lose the home equity.

KlangFool
Second this. If you're in CA with non-recourse loan. Put down 20% and invest the rest. May even go with an ARM or I/O to lower the interest rate, though that will depend on your risk tolerance and your view on future interest rate.
Interesting...but I don't think a 20% would work for me because my "end of month savings" would then be negative and my cash position would dwindle down month by month.

For example, let's assume a $1.65M house

Scenario 1
20% Down - $330K
Mortgage - $1.325M
Remaining Cash to Invest - $1.35M
End of Month "Savings" - Negative $500

Scenario 2
Down - $900K
Mortgage -$750K
Remaining Cash to Invest - $790K
End of Month "Savings" - $2K
KlangFool
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Re: Down Payment Strategy

Post by KlangFool »

socialforums2019 wrote: Tue Apr 06, 2021 2:25 pm
jarjarM wrote: Tue Apr 06, 2021 12:01 pm
KlangFool wrote: Tue Apr 06, 2021 11:39 am OP,

Are you from California or one of the states with non-recourse loan? If yes, you should put as little money down as possible. If the housing market crashes, you can walk away from the house and the mortgage. You may even want to look at interest-only mortgage.

You would make money if the house's value goes up. And, you are protected on the down size. In the worst case, you only lose the home equity.

KlangFool
Second this. If you're in CA with non-recourse loan. Put down 20% and invest the rest. May even go with an ARM or I/O to lower the interest rate, though that will depend on your risk tolerance and your view on future interest rate.
Interesting...but I don't think a 20% would work for me because my "end of month savings" would then be negative and my cash position would dwindle down month by month.

For example, let's assume a $1.65M house

Scenario 1
20% Down - $330K
Mortgage - $1.325M
Remaining Cash to Invest - $1.35M
End of Month "Savings" - Negative $500

Scenario 2
Down - $900K
Mortgage -$750K
Remaining Cash to Invest - $790K
End of Month "Savings" - $2K
socialforums2019,

A) Are you claiming that extra (900K - 330K =) 570K worth of investment are incapable of generating $6K of CASH/income in one year? Then, how could scenarios 1 could be negative $500? It should be at least positive $500 with 2% dividend.

B) The bottom line here is

Scenario 1 -> 1.625 million house plus 1.35 M outside house. If you are unemployed and the house crashes, you can walk away and start your life some place else.

Scenario 2 -> 1.625 million house plus 790K outside the house. You cannot walk away from the house. You have 750K tied to the house.

C) If bad things happened, with 1.35 million outside the house, you can survive much longer.

D) If good things happened, aka everything went well, you can pay off the house much faster with scenario 1 too. You have extra 570K earning much more than your mortgage interest rate.

E) Scenario 1 is financially safer for you. It is good from both the up side and the down side.

KlangFool
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jarjarM
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Joined: Mon Jul 16, 2018 1:21 pm

Re: Down Payment Strategy

Post by jarjarM »

socialforums2019 wrote: Tue Apr 06, 2021 2:25 pm
jarjarM wrote: Tue Apr 06, 2021 12:01 pm
KlangFool wrote: Tue Apr 06, 2021 11:39 am OP,

Are you from California or one of the states with non-recourse loan? If yes, you should put as little money down as possible. If the housing market crashes, you can walk away from the house and the mortgage. You may even want to look at interest-only mortgage.

You would make money if the house's value goes up. And, you are protected on the down size. In the worst case, you only lose the home equity.

KlangFool
Second this. If you're in CA with non-recourse loan. Put down 20% and invest the rest. May even go with an ARM or I/O to lower the interest rate, though that will depend on your risk tolerance and your view on future interest rate.
Interesting...but I don't think a 20% would work for me because my "end of month savings" would then be negative and my cash position would dwindle down month by month.

For example, let's assume a $1.65M house

Scenario 1
20% Down - $330K
Mortgage - $1.325M
Remaining Cash to Invest - $1.35M
End of Month "Savings" - Negative $500

Scenario 2
Down - $900K
Mortgage -$750K
Remaining Cash to Invest - $790K
End of Month "Savings" - $2K
That's why you may want to explore beyond 30 yr fixed, especially if there's a good chance of moving before 30yr. 10/1 or 7/1 ARM can be obtain for 2.5% or so for Jumbo purchase loan with a $1M relationship at Schwab today.
Golf maniac
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Location: Florida

Re: Down Payment Strategy

Post by Golf maniac »

Not enough information provided. What is your current age and when do you want to retire? Is the 2k for savings before or after retirement savings? What is your after tax return on taxable portfolio? How secure is income sources? What kind of housing ratios will you have under the various scenarios?
Topic Author
socialforums2019
Posts: 168
Joined: Sun Aug 25, 2019 10:12 am

Re: Down Payment Strategy

Post by socialforums2019 »

KlangFool wrote: Tue Apr 06, 2021 2:50 pm
socialforums2019 wrote: Tue Apr 06, 2021 2:25 pm
jarjarM wrote: Tue Apr 06, 2021 12:01 pm
KlangFool wrote: Tue Apr 06, 2021 11:39 am OP,

Are you from California or one of the states with non-recourse loan? If yes, you should put as little money down as possible. If the housing market crashes, you can walk away from the house and the mortgage. You may even want to look at interest-only mortgage.

You would make money if the house's value goes up. And, you are protected on the down size. In the worst case, you only lose the home equity.

KlangFool
Second this. If you're in CA with non-recourse loan. Put down 20% and invest the rest. May even go with an ARM or I/O to lower the interest rate, though that will depend on your risk tolerance and your view on future interest rate.
Interesting...but I don't think a 20% would work for me because my "end of month savings" would then be negative and my cash position would dwindle down month by month.

For example, let's assume a $1.65M house

Scenario 1
20% Down - $330K
Mortgage - $1.325M
Remaining Cash to Invest - $1.35M
End of Month "Savings" - Negative $500

Scenario 2
Down - $900K
Mortgage -$750K
Remaining Cash to Invest - $790K
End of Month "Savings" - $2K
socialforums2019,

A) Are you claiming that extra (900K - 330K =) 570K worth of investment are incapable of generating $6K of CASH/income in one year? Then, how could scenarios 1 could be negative $500? It should be at least positive $500 with 2% dividend.

B) The bottom line here is

Scenario 1 -> 1.625 million house plus 1.35 M outside house. If you are unemployed and the house crashes, you can walk away and start your life some place else.

Scenario 2 -> 1.625 million house plus 790K outside the house. You cannot walk away from the house. You have 750K tied to the house.

C) If bad things happened, with 1.35 million outside the house, you can survive much longer.

D) If good things happened, aka everything went well, you can pay off the house much faster with scenario 1 too. You have extra 570K earning much more than your mortgage interest rate.

E) Scenario 1 is financially safer for you. It is good from both the up side and the down side.

KlangFool
What I'm saying is that if I only put 20% down, then from a cash flow perspective, after paying all bills and allocations for other bills (e.g. property taxes) I have a negative cash flow of $500. This does not account for whatever potential gains are made on that $1.35M that is to be invested. My thought process is that you wouldn't want to be pulling the gains from that $1.35M because you'll be taxed at ordinary income (32% for me).

I get your scenarios, but the challenge I face is that I am only pre-approved for a $1M loan at the moment. So if we had a 1.625M house, we'd have to put $625K down off the bat. On top of that, once my current house sells, the net difference between what I bought v.s. anticipated sale is just shy of $500K. To not get taxed on that $500K gain, I'll need to do a 1031 and put that money into the new house correct? So that you're at $625K down + $500K exchange = $1.125M into the house.

So I don't see anyway for me to just put down 20% and then invest the rest now that I play out the scenario.
Last edited by socialforums2019 on Wed Apr 07, 2021 6:06 am, edited 2 times in total.
Topic Author
socialforums2019
Posts: 168
Joined: Sun Aug 25, 2019 10:12 am

Re: Down Payment Strategy

Post by socialforums2019 »

jarjarM wrote: Tue Apr 06, 2021 3:32 pm
socialforums2019 wrote: Tue Apr 06, 2021 2:25 pm
jarjarM wrote: Tue Apr 06, 2021 12:01 pm
KlangFool wrote: Tue Apr 06, 2021 11:39 am OP,

Are you from California or one of the states with non-recourse loan? If yes, you should put as little money down as possible. If the housing market crashes, you can walk away from the house and the mortgage. You may even want to look at interest-only mortgage.

You would make money if the house's value goes up. And, you are protected on the down size. In the worst case, you only lose the home equity.

KlangFool
Second this. If you're in CA with non-recourse loan. Put down 20% and invest the rest. May even go with an ARM or I/O to lower the interest rate, though that will depend on your risk tolerance and your view on future interest rate.
Interesting...but I don't think a 20% would work for me because my "end of month savings" would then be negative and my cash position would dwindle down month by month.

For example, let's assume a $1.65M house

Scenario 1
20% Down - $330K
Mortgage - $1.325M
Remaining Cash to Invest - $1.35M
End of Month "Savings" - Negative $500

Scenario 2
Down - $900K
Mortgage -$750K
Remaining Cash to Invest - $790K
End of Month "Savings" - $2K
That's why you may want to explore beyond 30 yr fixed, especially if there's a good chance of moving before 30yr. 10/1 or 7/1 ARM can be obtain for 2.5% or so for Jumbo purchase loan with a $1M relationship at Schwab today.
As noted above, I'm currently approved for a $1M loan, so I'd have to fork up the difference as the down payment. On a 1.625M house, that is already a 38% down of $625K.
Topic Author
socialforums2019
Posts: 168
Joined: Sun Aug 25, 2019 10:12 am

Re: Down Payment Strategy

Post by socialforums2019 »

Golf maniac wrote: Tue Apr 06, 2021 3:44 pm Not enough information provided. What is your current age and when do you want to retire? Is the 2k for savings before or after retirement savings? What is your after tax return on taxable portfolio? How secure is income sources? What kind of housing ratios will you have under the various scenarios?
We are in our mid 30's with the goal to be able to retire in 20 years if everything goes well.

The 2K monthly savings is after retirement savings, but that only includes maxing the 401K. Ideally, what I would like to do with $1K of that $2K monthly savings, is put another $12K/year towards retirement savings.

Currently at this moment, I only have retirement portfolio consisting of 401K, small Roth IRA and small HSA. The sum of those accounts is $415K. A lot of my equity (~$500K) is in my current house but would need to be transferred to the next house to avoid paying capital tax gains.
Golf maniac
Posts: 751
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Location: Florida

Re: Down Payment Strategy

Post by Golf maniac »

Given your answers I would finance up to the $1 million that you have been approved for and invest the remaining. This should give you around $1k per month savings. Assumptions I am making are you have done the rent vs buy calculation and your income is secure. If you get promotions and raises you should be fine. The taxable account will protect you from disaster such as loss of income. Best of luck on your journey.
jarjarM
Posts: 989
Joined: Mon Jul 16, 2018 1:21 pm

Re: Down Payment Strategy

Post by jarjarM »

socialforums2019 wrote: Wed Apr 07, 2021 5:43 am
That's why you may want to explore beyond 30 yr fixed, especially if there's a good chance of moving before 30yr. 10/1 or 7/1 ARM can be obtain for 2.5% or so for Jumbo purchase loan with a $1M relationship at Schwab today.
As noted above, I'm currently approved for a $1M loan, so I'd have to fork up the difference as the down payment. On a 1.625M house, that is already a 38% down of $625K.
[/quote]

Oops, sorry missed that. Then in that case, just finance up to the maximum and invest the rest. I think your investment will generate more return than the $2k/month cash flow.
KlangFool
Posts: 20069
Joined: Sat Oct 11, 2008 12:35 pm

Re: Down Payment Strategy

Post by KlangFool »

socialforums2019 wrote: Wed Apr 07, 2021 5:43 am
As noted above, I'm currently approved for a $1M loan, so I'd have to fork up the difference as the down payment. On a 1.625M house, that is already a 38% down of $625K.
socialforums2019,

Can you borrow more if it is an interest-only loan?

KlangFool
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