Author Topic: Best to put more down for a home or preserve investments?  (Read 1657 times)

MrGville

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Best to put more down for a home or preserve investments?
« on: October 28, 2016, 08:08:03 AM »
For example...

If one is considering purchasing a $215k home, a 20% down payment is ~$43k.  According to zillow, the monthly payment on this home after a 20% down payment would be $771 before taxes and insurance.  However, if only a 5% down payment was used (~10k), the payment would increase to $895 (and yes, insurance would go up some as well). 

Lets assume the purchaser has $75k in savings and earns $100k per year.  What would you do?  Go ahead with the 20% down payment, or go with the smaller down payment to keep as much of your savings invested as possible? 

Thanks

frugaliknowit

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Re: Best to put more down for a home or preserve investments?
« Reply #1 on: October 28, 2016, 08:12:39 AM »
You need to isolate the rate of return on NOT paying the PMI.  Annual PMI/Extra 15% down = yield on avoiding PMI.  Then decide if you prefer that yield to alternative investment.

MrGville

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Re: Best to put more down for a home or preserve investments?
« Reply #2 on: October 28, 2016, 08:18:05 AM »
frugaliknowit, any idea on how much insurance costs increase by not putting 20% down?  Or is that hard to answer with the info you have?

Frugalman19

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Re: Best to put more down for a home or preserve investments?
« Reply #3 on: October 28, 2016, 08:26:55 AM »
There are a ton of mortgage calculators out there that will factor in the PMI. This topic is discussed alot in this forum. Let me save you alot of trouble.

If you leave the money in the investment account, you hope that it gains more than the 4% you'd be paying on interest and PMI. If you put the 20% down, your investment account will be smaller, but you'll have more equity in your home and you wont have to pay PMI. Its all a personal choice.

Personally I hate the fact of paying PMI when you dont have to, who's to say that you leave the money in the investment account, pay the PMI and the market does terrible. Then you just spent a number of years paying PMI and watching your investment account go down.

frugaliknowit

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Re: Best to put more down for a home or preserve investments?
« Reply #4 on: October 28, 2016, 08:28:30 AM »
frugaliknowit, any idea on how much insurance costs increase by not putting 20% down?  Or is that hard to answer with the info you have?

I would suggest you have a lender and or mortgage broker do that for you. 

doneby35

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Re: Best to put more down for a home or preserve investments?
« Reply #5 on: October 28, 2016, 08:57:16 AM »
Do not ever put down less than 20%, that's all... Why would you want to pay for PMI, that's a lot of money wasted.

MrGville

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Re: Best to put more down for a home or preserve investments?
« Reply #6 on: October 28, 2016, 09:27:12 AM »
Based on some quick research, it appears that PMI annually cost 0.5% to 1% of the remaining mortgage.  So $2,000 a year ($167 a month) for a $200,000 mortgage if using a cost of 1%.  So based on that  ~32k you would saved by only putting down 5% as a down payment would have to return over 6.25% a year.  Seems risky....20% is the way to go based off of that calculation (if accurate)

zephyr911

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Re: Best to put more down for a home or preserve investments?
« Reply #7 on: October 28, 2016, 11:04:45 AM »
I'm afraid if you want a quality answer, you're going to have to dig deeper into the numbers than you or any of the commenters have yet. Get comfortable and take your time. It's worth it.

Last time I bought, about two years ago, I worked out the marginal cost of credit for all of my loan options, 3 each from 3 different lenders. There are different ways to do this, but for me, the most straightforward approach was to start with the smallest down payment, calculating the annual cost of credit for that loan, then work out the annual cost savings for each incrementally higher down payment, and turn that into an annual return percentage based on the incremental money down.

Our basic options were 3.5% down (FHA w/ PMI), 10% down w/ PMI, and 20% down, no PMI. I'll describe my calculations only for the lender I actually used, the one with the lowest closing costs, but I did this for each of 3. I don't have all the exact numbers with me but I remember enough to reconstruct it reasonably well. Our home cost $122,900, FTR.

With the 3.5% down FHA loan, the rate was higher and the PMI was nearly $200/mo - and it didn't go away no matter how much you paid the loan down. So, unsurprisingly, it was worth paying more to reach the next tier. But I did the math to make sure (and you should do the math!). The extra $8k to reach 10% down eliminated roughly $1800 in annual costs, for a return of over 20%. However, below 90% LTV, the rate didn't change much, and the PMI was only $32/mo. So, putting another $13K into the down payment would have only saved $768 per year: 6.25% pretax, 4.7% after tax (25% bracket). On top of that, we'll easily be out of PMI very soon, dropping the long-term marginal cost of credit even lower.

Meanwhile, our market returns have run in the 15% range - not without risk, but totally acceptable risk during an accumulation phase. The investment returns from year 1 alone covered all of the PMI we'll ever pay. Does this mean 10% is the best DP for you? Absolutely not! It just illustrates that the details matter.