What to do with $20k? Add to down payment or buy points

[FIREball567]

So we locked in a 30 year fixed rate at 3.625% today on a mortgage of $384,000 (20% down payment not included in this). My parents are gifting us $20k and wants us to add it to our 20% down payment of $96k. This addition makes our down payment 24% at $116k. For me, I rather use that money for my retirement account and my taxable account, but since they're being so generous, I will do as they say.

Now my question is, which makes more sense? Adding this $20k to my down payment or buying as many discount points as I can with this money to reduce my interest rate from 3.625%?

A couple of important details about my situation
- This will be a forever home to live in for decades
- At a 3.625 interest rate, I don't anticipate it dropping much lower in the future for a refinance
- My job as a teacher is very stable and I have job protection (tenure) and a future pension.



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[Kayad]

This is just a math problem, given your expectation that this is your forever home.  Which approach will save you more?   We can’t answer without knowing how many points you can buy for 20k.  I strongly suspect putting the $ to the down payment is going to be the best option.  Added bonus is if unforeseen life changes force a move sooner than planned, you are more likely to be able to recoup that money if it has gone to home equity.

[FIREball567]

This is just a math problem, given your expectation that this is your forever home.  Which approach will save you more?   We can’t answer without knowing how many points you can buy for 20k.  I strongly suspect putting the $ to the down payment is going to be the best option.  Added bonus is if unforeseen life changes force a move sooner than planned, you are more likely to be able to recoup that money if it has gone to home equity.

I did the math and noticed how much I'll pay after 30 years:
1) Without their gift, I'll pay $630,360 total.
2) Add $20k to down payment - I'll pay $597,600 total.
3) Buy $20k worth of points = 5.2 points = 1.302% reduction which brings my interest rate down to 2.323%. I'll pay $533,520.
4) Not going to do this, but if I put the $20k in a taxable account and get 7% interest and deduct it from #1 above, I would end up paying $498,115 total.

So it seems buying $20k worth of points will help me reduce my monthly mortgage and help me save $64,000 over a 30 year period instead of adding it to my down down payment.


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[reeshau]

Would applying the extra money allow you to go down to a 15 year mortgage?  Your monthly payment will increase some, but you are looking at total amount paid, and it will be way less.

Bankrate shows a 30-year at 3.88%.  Having said that...

$364k x 3.19% x 15 year mortgage = $458,480, monthly payment $2,547  (your 30-year payment is $1,751)

My worry about points is that, should you be wrong about this being your forever home, that money is gone.  If you put it into equity, then you can at least get it back out, assuming you aren't in a local real estate bubble.

The average person in the US lives in 13 places over their lifetime.  That shocked me, until I realized that, at 45, I had already clocked in at 12.  (and am in #13 now--and not in the US)  Plans change, unexpected things happen, and the best solutions aren't necessarily the ones optimized for the "happy path," but rather the best total expected outcome.

[DeniseNJ]

Would applying the extra money allow you to go down to a 15 year mortgage?  Your monthly payment will increase some, but you are looking at total amount paid, and it will be way less.

Bankrate shows a 30-year at 3.88%.  Having said that...

$364k x 3.19% x 15 year mortgage = $458,480, monthly payment $2,547  (your 30-year payment is $1,751)

My worry about points is that, should you be wrong about this being your forever home, that money is gone.  If you put it into equity, then you can at least get it back out, assuming you aren't in a local real estate bubble.

The average person in the US lives in 13 places over their lifetime.  That shocked me, until I realized that, at 45, I had already clocked in at 12.  (and am in #13 now--and not in the US)  Plans change, unexpected things happen, and the best solutions aren't necessarily the ones optimized for the "happy path," but rather the best total expected outcome.

I wouldn't put it into a 15 yr unless it's at a way lower rate.  You can always prepay it you want to.  the 30 yr gives you options.

I do like the idea of the equity though since you just never know, but I get that 60K in savings is nothing to sneeze at.  Since OP would rather put it in stocks, how about do both?  The monthly savings in cash flow from the points and rate being lower could go straight into an index fund.  That way over time, you have not only saved 60K in interest but invested that savings.  If you had to sell early, you wouldn't have the 20K in the house but you would have how ever many years of savings from a reduced payment invested.  This only works if you really do calculate the difference and have that automatically redirected, but it doesn't sound like you are likely to blow the difference on new furniture.

[Rdy2Fire]

I wouldn't put it into a 15 yr unless it's at a way lower rate.  You can always prepay it you want to.  the 30 yr gives you options.

I do like the idea of the equity though since you just never know, but I get that 60K in savings is nothing to sneeze at.  Since OP would rather put it in stocks, how about do both?  The monthly savings in cash flow from the points and rate being lower could go straight into an index fund.  That way over time, you have not only saved 60K in interest but invested that savings.  If you had to sell early, you wouldn't have the 20K in the house but you would have how ever many years of savings from a reduced payment invested.  This only works if you really do calculate the difference and have that automatically redirected, but it doesn't sound like you are likely to blow the difference on new furniture.

I tend to agree with DeniseNJ's thinking. Since you never plan on selling your "forever home" I don't think the sell early applies but the rest of it makes sense from a straight forward investment perspective. In my case I wanted to pay off my house sooner then later so I was very aggressive but I didn't necessarily plan to stay forever and bought when market/prices were high. I would do something like what she is suggesting with a little extra so if the difference is $84 a month maybe do $120 and stretch it a little

[SuperSecretName]

I'm always a fan of splitting the difference.  Do half to down payment, half to buy points.

Although you think it may be your forever home, it may not turn out that way for whatever reason.  Points have a long break-even point, so you could end up losing some of that money.

[acepedro45]

I'm against the points idea. Other posters have already pointed out the life doesn't always unfold exactly to plan, especially over the long horizons that the points benefit assumes. There is illness, job loss, divorce, an amazing job opportunity in a new location and a host of other unforeseen possibilities...SO many ways for things to go against the plan over a 30 year horizon.

Nobody has yet mentioned that interest rates could go even lower in the future, and by prepaying points you've locked yourself out of the refinance market. You mentioned you don't think they can go much lower, but you might want to rethink that prediction. Many people have ended up losing vast sums of money, looking foolish, or both at the same time making forecasts about the future movements of interest rates, even highly informed predictions.

The math does favor investing in the market (RIP Boarder42) but I think the second best option is a larger down payment.

[Catbert]

Another vote for larger down payment.  Stuff happens that might change your life in ways you don't anticipate over the next 30 years.  Triples...amazing job offer across country...FIRE to another country...divorce...the list is endless.

[frugaliknowit]

Please don't take this as an insult to your intelligence, just some wisdom from an older person who has seen a lot:

There's "no such thing" as a "forever home".  I am NOT saying this WON'T be your "forever home", but chances are NOT.  Life happens, things change.

That said:

  You should abide by your parent's wishes and add their gift to the down payment and not "buy points", since that is usually a loser unless you hold a long time.

[JLee]

This is just a math problem, given your expectation that this is your forever home.  Which approach will save you more?   We can’t answer without knowing how many points you can buy for 20k.  I strongly suspect putting the $ to the down payment is going to be the best option.  Added bonus is if unforeseen life changes force a move sooner than planned, you are more likely to be able to recoup that money if it has gone to home equity.

I did the math and noticed how much I'll pay after 30 years:
1) Without their gift, I'll pay $630,360 total.
2) Add $20k to down payment - I'll pay $597,600 total.
3) Buy $20k worth of points = 5.2 points = 1.302% reduction which brings my interest rate down to 2.323%. I'll pay $533,520.
4) Not going to do this, but if I put the $20k in a taxable account and get 7% interest and deduct it from #1 above, I would end up paying $498,115 total.

So it seems buying $20k worth of points will help me reduce my monthly mortgage and help me save $64,000 over a 30 year period instead of adding it to my down down payment.


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Are you taking into account that money is worth less over time?  Saving $20k today is far more significant than saving $20k in 25 years.

[aceyou]

Michigan math teacher chiming in, hello!

I'd put it onto the down payment. 

1.  Your parents asked you to do it for that purpose.  That is a meaningful amount of money, and if they asked you to use it in that way, it's not only to help you, but because that action will make them happy.  That's worth something. 

2.  You might not live there forever as frugaliknowit pointed out.  My years on this rock have taught me that predicting what I will and won't want many years into the future is tougher than I thought.  You can knock 20k of principal off your loan TODAY.  That's worth something. 

3. How long have you been teaching?  How many years till the pension?  Will you FIRE before hitting that many years?  I ask because my wife and I chose to go to a 15-year note based on these questions.  We get our pensions in 2031, which is when we plan to retire, so got a 15 year mortgage that will be paid off in 2030.  Probably wouldn't make a difference one way or the other to still have a mortgage at that time, but we thought it'd just be nice to retire not owing anyone anything:)  It makes us happy. 

Good luck, this is a great give your parents have given you, what generosity!!!

[MrThatsDifferent]

I’m confused, why can’t you use their $20k for the down payment but subtract $20k from what you saved to invest? Are they insisting that you have a 24% down payment regardless? If there is no budge, then sure, bigger down payment, but I’d try a bit harder for what you’d actually like to do with your money. Make a business case and present it to them if you have to.