Author Topic: How much to put towards a downpayment - philosophical question  (Read 4098 times)

ysette9

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I will be posting a very specific case study in the form of a spreadsheet, asking for experts to double check my numbers and weigh in on our FIRE plan. (I still have to scrub the spreadsheet of personal info but I hope to get that posted in the next day or two.) So without going into the details yet I want to ask generally what your thoughts are on how much money to put for a down payment when buying a place if one has the choice.

In round numbers we have about $500k in retirement accounts between the two of us and $500k in taxable Vanguard accounts. We are considering buying a place (currently renting) in the next year or two. Our max purchase price is $800k. I have conflicting thoughts:

1. I would like to put as much down as possible to keep the housing payment low, save on interest, and allow us to continue saving as much as possible each month.
2. I'd like to keep as much as possible in the market actively working for us. As much as paying mortgage interest sucks, the average rate of return on that money when invested is greater.
3. On the other hand, putting a lot down would allow us to have a very comfortable housing expense while still taking advantage of a 15-year loan (and the lower rate it comes with).
4. On the third hand (how many hands do I have?) it may be better to save less each month going forward due to higher mortgage payment in order to keep my currently-invested assets growing in the market (more time in the market).


What are your thoughts?

Nubs

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Re: How much to put towards a downpayment - philosophical question
« Reply #1 on: April 20, 2015, 03:50:26 PM »
Yes

wtjbatman

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Re: How much to put towards a downpayment - philosophical question
« Reply #2 on: April 20, 2015, 03:50:56 PM »
If I was looking for advice on buying an $800,000 house, I wouldn't be looking here.

I recommend heading on over to http://www.bogleheads.org and asking there. Not only do more high earners frequent those forums, but it's not a forums dedicated to frugality and minimalism.

Nubs

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Re: How much to put towards a downpayment - philosophical question
« Reply #3 on: April 20, 2015, 04:08:02 PM »
Ok, just kidding.  I am currently going through the same exact thing.  We landed on 15 year mortgage, with 20%.  As far as pure mathematical logic goes, a 30 year with 20% down is probably the smartest -- as you probably already know. 

My wife and I saw 20% with a 15 year as a good middle ground.  Putting that extra money into your mortgage lowers the payment, but you have to put a lot in to get a significantly lower payment and it is probably better in the market. 

But you know all of this already, kind of on the emotional side of the decision now aren't ya?

Nubs

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Re: How much to put towards a downpayment - philosophical question
« Reply #4 on: April 20, 2015, 04:10:04 PM »
If I was looking for advice on buying an $800,000 house, I wouldn't be looking here.

I recommend heading on over to http://www.bogleheads.org and asking there. Not only do more high earners frequent those forums, but it's not a forums dedicated to frugality and minimalism.

You know, there are places in this country and abroad with extremely high real estate values -- where $800,000 would be a pretty reasonably sized mustachian house.  I see no need to jump on OP quite so fast before all of the facts are made clear.

ysette9

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Re: How much to put towards a downpayment - philosophical question
« Reply #5 on: April 20, 2015, 04:15:31 PM »
I know that $800k is not the average but I think my question holds true whether you are looking at purchasing something that is $50k or $2M. It is beside the point, but at that price point we are not even looking at houses but condos.

MDM

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Re: How much to put towards a downpayment - philosophical question
« Reply #6 on: April 20, 2015, 04:43:37 PM »
As far as pure mathematical logic goes, a 30 year with 20% down is probably the smartest -- as you probably already know. 
+1

Good thoughts in the rest of the quoted post as well.

ysette9

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Re: How much to put towards a downpayment - philosophical question
« Reply #7 on: April 20, 2015, 05:04:32 PM »
I appreciate the input. There definitely is an emotional element to it as well. We are trying hard to remove that and consider only the numbers to reduce the amount of decisions to be made, but it is still opaque sometimes. I suppose that is life in the real world!

NoraLenderbee

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Re: How much to put towards a downpayment - philosophical question
« Reply #8 on: April 20, 2015, 05:05:30 PM »
We also live in a HCOL. We decided to make a large (very large) down payment when we bought our house, even though that's not the most mathematically advantageous. I am the breadwinner, my DH earns very little, and I work in a cyclical industry. I needed to know that if I got laid off and had to fall back on freelance work or less than full-time work, I would still be able to make the payments. So keeping the payment moderate was a bigger priority for us than maximizing the return on the down payment amount.

I did get laid off (some years later) and didn't get a new job for 5 months, and I was glad I didn't have to come up with an extra 1-2K per month for the mortgage.

You need to assess your comfort level with the alternatives and do the sleep test. Could you sleep at night knowing you had a big brokerage account along with a big monthly nut? Or would feel happier with less invested and a lower payment, plus more monthly saving to replenish your investments?


Dicey

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Re: How much to put towards a downpayment - philosophical question
« Reply #9 on: April 20, 2015, 05:22:21 PM »
Twenty percent and not a penny more. DH and I paid cash for our house about two yeaars ago and we are still smarting that we didn't get a mortgage. Rates this low are not historically normal. When rates do normalize, those holding long term mortgages in the sub-4 range are going to look like the geniouses they are. Keep the rest of your money invested. You can always cash out later; overpaying the mortgage at the expense of investing won't get you as far as fast. We're all about retiring early here, not retiring eventually.
BTW - You are doing a lot of things right, including asking questions like this. Best of luck to you!

chasesfish

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Re: How much to put towards a downpayment - philosophical question
« Reply #10 on: April 20, 2015, 05:32:11 PM »
How long do you think you'll be in the house?  If its for the next 15 years then a 15 year fixed carries a much lower interest rate.  Put the 20% down and even supplement the payment if you have to.

If you don't plan on being there in 7 years (like going to sell and do a mustacian retirement), the 7/1 ARM is a better rate.  You also have the cash to just pay it down/off if rates go insane 6 years from now.

RangerOne

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Re: How much to put towards a downpayment - philosophical question
« Reply #11 on: April 20, 2015, 06:42:11 PM »
It seems like these questions come down to a risk analysis and risk tolerance of those involved.

You could put a little down and get a fairly hefty mortgage and keep your other money invested. If you both stay employed or earning high incomes then you will end up ahead. However if things go south and your income drops and you can't carry payments for a long time you could lose the house or at least some sleep.

Having no debt makes you the most flexible, I think, but possibly not the most money.

I would say if putting more down now and paying off the house sooner doesn't harm your retirement goals then do it. But I value sleep, security, and simplicity over a little extra money.

SwordGuy

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Re: How much to put towards a downpayment - philosophical question
« Reply #12 on: April 20, 2015, 07:48:24 PM »
If I was looking for advice on buying an $800,000 house, I wouldn't be looking here.

I recommend heading on over to http://www.bogleheads.org and asking there. Not only do more high earners frequent those forums, but it's not a forums dedicated to frugality and minimalism.

How about considering renting until you are FI or can move to a more reasonably priced area.  Then you can spend $300,00 and get a palace.

ysette9

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Re: How much to put towards a downpayment - philosophical question
« Reply #13 on: April 20, 2015, 08:28:41 PM »
Good discussion; I love getting the thoughts of everyone else in the forum.

We are pretty committed to staying in this area. It is always possible we could sell a $800k place and get a place for maybe $650k, but moving far away to someplace where we can buy for $200k is not in the cards. When the day comes that I am not spending my weekdays in some air conditioned office it will be that much more important to live in a place I love surrounded by a million free play activities to choose from!

Good question about how long we will be there. We are thinking this will be the "forever home". We have run the calculations for rent/buy and thought about this pretty hard. We have concluded that we can rent or buy and both scenarios would work out in the long run. For emotional reasons though I think we ultimately prefer to own a place even if the numbers are a wash. Renting is a great option for us right now because we lucked out an got a great deal. This great deal isn't perfect and eventually we will have to find another place. Whether it is the lack of a bathtub and my baby outgrowing the kitchen sink or later on down the line when she can't go to the local public school because it is so lousy, we will move. When we do move our choices will be to buy or to rent a place that likely will be a good amount more than where we are currently at.

Thankfully the cost of dithering as we think these things through isn't too bad: we're saving on rent and the difference is going into Vanguard. There is always the fear that housing prices are going up faster than we can save/invest and, of course, we all know that interest rates will be going up here at some point.

chasesfish

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Re: How much to put towards a downpayment - philosophical question
« Reply #14 on: April 21, 2015, 05:36:52 AM »
ysette:  Good luck on your decision, I think the 15 year fixed at 20% down is the way to go.

We're in a similar position, can FIRE, but I enjoy my job and big city housing is expensive.   You always have the option to hang it up and move if you want to stop working.