Author Topic: How much downpayment?  (Read 2060 times)

rokel

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How much downpayment?
« on: March 20, 2018, 03:09:58 PM »
Hello my husband and I are about to enter into contract on a house in Westchester for $460,000. We have just about enough saved up to pay all cash, but it probably would be a little too tight with closing costs and work that needs to be done. We offered to put down 40% in our offer, but I wonder if we should put down more since mortgage interest rates are currently 4.5% and my investments aren't doing much better than that. What would help us reach FIRE earliest? We both make about 100k and have two small children.

SwordGuy

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Re: How much downpayment?
« Reply #1 on: March 20, 2018, 03:18:17 PM »
Not buying a house that costs $460,000 "plus improvements" is likely to be your best choice for speeding up your time to FIRE.   

Congrats for being able to pay all (or mostly) cash for it though!

Long term US market results are 7% real return and 10% nominal (i.e., including inflation).   If your 4.5% mortgage is a fixed rate, the nominal return is the one to consider.  Long term, investing would get you ahead faster.

Short term, it's anybody's guess what the market will do.

RWD

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Re: How much downpayment?
« Reply #2 on: March 20, 2018, 03:20:07 PM »
Putting down 20% would be better. Putting down more than 20% typically doesn't get you a better rate. If your investments haven't been beating 4.5% by a huge margin over the last few years then you've been doing something very wrong.

rokel

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Re: How much downpayment?
« Reply #3 on: March 20, 2018, 08:59:31 PM »
Thanks for the advice! We already offered to put 40% down in an effort to make a strong offer and beat out other bids (there were 7 bids over asking). I just wasn't sure if I should be putting down more, but good to know that we should not put down any more.

I figured my investments should have done a lot better but i was afraid and put the majority in VBTLX. I probably need to go ask for advice from the investing forum too!

Thanks again

mtnman125

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Re: How much downpayment?
« Reply #4 on: March 21, 2018, 12:30:00 PM »
Curious why down payment amount would influence the SELLER to take your offer vs. other bids?


I'm planning/hoping to be in a similar position in the next few years and plan to put down minimum to get best rate (20%), and invest the rest.

rokel

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Re: How much downpayment?
« Reply #5 on: March 21, 2018, 01:04:19 PM »
I think because if the appraisal comes back lower, it won't affect our ability to get a mortgage since we're putting extra money down.

Michael in ABQ

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Re: How much downpayment?
« Reply #6 on: March 22, 2018, 02:36:13 PM »
A buyer who is not dependent on financing is in a stronger negotiating position. Cash is king. As a seller if you've got a buyer trying to finance 97% at $465,000 or one trying to finance 50% at $460,000 you would probably want to take the lower offer. If the first buyer can't get their financing you get to start back over and some of the other bidders might have moved on since then. If the house is appraised for $445,000 the buyer with 97% financing can only get a mortgage for $431,650 and now has to come up with another $30k in cash. On the other hand if you are putting well over 20% down then that isn't an issue.

Personally I would try to pay all or mostly cash. While there is some arbitrage between borrowing at 4.5% and earning 7% in the market, there's also risk. You might earn 7%, you might earn 15%, or you might lose 10%. If you have a paid for house you can save/invest a huge chunk of cash every year. With a 15-year mortgage at 60% your annual payments are going to be $16,781. On a 15-year mortgage your payments would total $25,337. Pay all or mostly cash and all of that income is freed up to be invested.


kenmoremmm

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Re: How much downpayment?
« Reply #7 on: March 22, 2018, 03:51:52 PM »
how short of the $460k purchase price are you and how long would it take to acquire a safety net again? i would love to buy a house in cash. the mental stress relief would be worth whatever marginal gains you would've had in a taxable investment like mutual funds.

Dicey

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Re: How much downpayment?
« Reply #8 on: March 23, 2018, 10:30:42 AM »
Once you're in escrow and working on your loan, you can tweak the amount you borrow. The seller's going to get a check for the full amount, either way.

Therefore, the answer is 20% down and a nice, fixed rate 30 year loan with no prepayment. Then go read jlcollinsnh's stock series so you can get a better return on your investments.

Having money in the bank/investments with which to make mortgage payments, repairs, replacements, etc. Is far more secure than no mortgage and no money, especially in the case of job loss or other emergency.

Don't just take my word for it, let's see what @boarder42 has to say.


Fishindude

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Re: How much downpayment?
« Reply #9 on: March 23, 2018, 01:29:33 PM »
A buyer who is not dependent on financing is in a stronger negotiating position. Cash is king. As a seller if you've got a buyer trying to finance 97% at $465,000 or one trying to finance 50% at $460,000 you would probably want to take the lower offer. If the first buyer can't get their financing you get to start back over and some of the other bidders might have moved on since then. If the house is appraised for $445,000 the buyer with 97% financing can only get a mortgage for $431,650 and now has to come up with another $30k in cash. On the other hand if you are putting well over 20% down then that isn't an issue.

Personally I would try to pay all or mostly cash. While there is some arbitrage between borrowing at 4.5% and earning 7% in the market, there's also risk. You might earn 7%, you might earn 15%, or you might lose 10%. If you have a paid for house you can save/invest a huge chunk of cash every year. With a 15-year mortgage at 60% your annual payments are going to be $16,781. On a 15-year mortgage your payments would total $25,337. Pay all or mostly cash and all of that income is freed up to be invested.

My thoughts as well.
There is a whole lot of freedom in not owing anybody anything.


boarder42

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Re: How much downpayment?
« Reply #10 on: March 23, 2018, 04:41:40 PM »
you only should be putting 20% down and investing the rest - paying it off as slow as possible 4.5% after normal inflation over 30 years is the most likely around 1.2%  if you want to get to FIRE as fast as possible the most likely way to get there fastest is by investing your money in VTSAX and paying your mortgage down slowly.  Not only does paying your mortgage down slowly make you MORE secure than paying it off quickly - it also in most cases and most being greater than 95% of the time will help you FIRE faster, its not even close. 

Not to mention if you're not maxing yout tax advantaged accounts those absolutely need to be maxed first. 

Lots of partially incorrect or flat out incorrect statements above

1. the 7% market returns to 4.5% mortgage are incorrect --- if you're going to remove inflation from market returns remove them from the mortgage payment so its 10-11% market vs 4.5% mortgage or 7% vs around 1.2-1.3% mortgage

2. Money is fungible the thought that dumping a shit ton into a house to "free up" more to invest is incorrect b/c that money you were dumping into the house could have been going to investments over that time.

3. Freedom in not owing - while at the end of the day once the house is free and clear you reduce sequence of return risk you increase inflationary risk .  Also if you pay down slowly over time instead of putting extra the money into investments  you actually lose freedom and security ..... Why?  if you start paying down you house and you lose your job you dont have as much liquidable capital as you would if you had been investing - sure the market could have tanked at the same time as job loss but there is still more money available to ride out the loss of job time than there is if you had been pumping it into a house - and guess what your payment doesnt change.

4. there is a mathematical advantage to a 15 year mortgage if you plan to stay in a house less than 7 years - which is actually pretty normal for most americans.  15 year mortgages investing the difference vs 30 year mortgages and investing the difference usually break even around 7 and the 30 starts to pull away strongly after that. Google michael blu jay 15 vs 30 and he has a calculator for this but most of the time its breakeven around 6-7 years between the 2.

5. just b/c you offered to put 40% down doesnt mean you have to keep your loan terms when you go to close you can adjust that to 20% down with no issues its just an offer how you pay for it since there is a loan and financing involved does not effect the closing unless you're bringing all cash which you're not doing - not sure why it would look more appetizing to the seller unless they know it wont appraise and you've got extra captial so they'll go with you.   

Best of luck
« Last Edit: March 24, 2018, 02:53:54 PM by boarder42 »

rokel

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Re: How much downpayment?
« Reply #11 on: March 24, 2018, 06:06:29 AM »
This is so incredibly helpful. Thank you so much.

Another Reader

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Re: How much downpayment?
« Reply #12 on: March 24, 2018, 07:26:07 AM »
The seller was induced into accepting your offer by the 40 percent down clause.  Changing your down payment  from 40 percent to 20 percent may require you to obtain agreement from the seller and you may be in default if you do not pursue the 40 percent option.  The seller may be able to put the property back on the market after providing notice and a period to cure the default.  Ask your agent what is permitted in your market before you do this.

jeroly

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Re: How much downpayment?
« Reply #13 on: March 24, 2018, 07:48:44 AM »
The seller was induced into accepting your offer by the 40 percent down clause.  Changing your down payment  from 40 percent to 20 percent may require you to obtain agreement from the seller and you may be in default if you do not pursue the 40 percent option.  The seller may be able to put the property back on the market after providing notice and a period to cure the default.  Ask your agent what is permitted in your market before you do this.

When I sold my house, the buyers said that they were putting 50% down. They showed financial statements that demonstrated they had the cash to do so, which was what we cared about at the time of going to contract - it showed that they would be able to get financing regardless of how the appraisal came in, their income / total debt load, etc.

When we actually closed, I had no idea how much they put down... we got a number of certified checks from a variety of sources that added up to the purchase price, and that was all we cared about at that point.

Another Reader

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Re: How much downpayment?
« Reply #14 on: March 24, 2018, 07:55:31 AM »
The seller was induced into accepting your offer by the 40 percent down clause.  Changing your down payment  from 40 percent to 20 percent may require you to obtain agreement from the seller and you may be in default if you do not pursue the 40 percent option.  The seller may be able to put the property back on the market after providing notice and a period to cure the default.  Ask your agent what is permitted in your market before you do this.

When I sold my house, the buyers said that they were putting 50% down. They showed financial statements that demonstrated they had the cash to do so, which was what we cared about at the time of going to contract - it showed that they would be able to get financing regardless of how the appraisal came in, their income / total debt load, etc.

When we actually closed, I had no idea how much they put down... we got a number of certified checks from a variety of sources that added up to the purchase price, and that was all we cared about at that point.

If the seller accepted a lower offer because of the higher down payment, the seller may have the option to void the contract after offering a cure period and might do that to accept a higher offer.  In practice, this matters primarily in very competitive high priced markets.

Dicey

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Re: How much downpayment?
« Reply #15 on: March 24, 2018, 11:36:44 AM »
The seller was induced into accepting your offer by the 40 percent down clause.  Changing your down payment  from 40 percent to 20 percent may require you to obtain agreement from the seller and you may be in default if you do not pursue the 40 percent option.  The seller may be able to put the property back on the market after providing notice and a period to cure the default.  Ask your agent what is permitted in your market before you do this.

When I sold my house, the buyers said that they were putting 50% down. They showed financial statements that demonstrated they had the cash to do so, which was what we cared about at the time of going to contract - it showed that they would be able to get financing regardless of how the appraisal came in, their income / total debt load, etc.

When we actually closed, I had no idea how much they put down... we got a number of certified checks from a variety of sources that added up to the purchase price, and that was all we cared about at that point.

If the seller accepted a lower offer because of the higher down payment, the seller may have the option to void the contract after offering a cure period and might do that to accept a higher offer.  In practice, this matters primarily in very competitive high priced markets.
Huh. I live in CA. I have purchased about ten houses in my state to date. In every transaction, everything is handled through an escrow account with a title company. The buyer gets a single check at the close of escrow. Nowadays, we always get pre-qualified and pre-approved for the loan so the seller knows the loan will be approved. They have zero business in my financials beyond that. In the end, they know nothing of my loan terms or even if I got fed up with the lender and said "fuck it" and paid cash. I doubt there are many more competitive, high-priced markets than urban CA.

Plus, your example rarely happens in such a market. The seller, with the help of their realtor, looks for the best offer that has the highest chance of being approved.* There's a small subset of buyers who overbid, then invent or exaggerate defects to try to drive the final price down. Savvy realtors try to steer their sellers away from these sharks. Higher offer is not always better offer. 40% down offer shows OP's committment to the property and ability to qualify for a loan, that's all.

OP should simply ask their realtor.

*The only time it might make a difference is if the seller is carrying any part of the loan. If that's the case here, I must have missed it.

Another Reader

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Re: How much downpayment?
« Reply #16 on: March 24, 2018, 02:09:15 PM »
Yes they should ask their agent.  If you don't follow through with the contract as written it can be grounds for termination of the contract under some circumstances.  I haven't done a contract in California in 20 years, but I have in Arizona, and if you change your financing, an addendum to be signed by the seller follows.  I dumped a buyer that could not qualify for a conventional loan because the rules changed in mid-contract and her incompetent mortgage broker didn't realize it would affect his borrower.  The buyer wanted to switch lenders and go under another program for which she may or may not have qualified.  Nope.  Breach of contract and she was out.

Dicey

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Re: How much downpayment?
« Reply #17 on: March 24, 2018, 05:10:50 PM »
Yes they should ask their agent.  If you don't follow through with the contract as written it can be grounds for termination of the contract under some circumstances.  I haven't done a contract in California in 20 years, but I have in Arizona, and if you change your financing, an addendum to be signed by the seller follows.  I dumped a buyer that could not qualify for a conventional loan because the rules changed in mid-contract and her incompetent mortgage broker didn't realize it would affect his borrower.  The buyer wanted to switch lenders and go under another program for which she may or may not have qualified.  Nope.  Breach of contract and she was out.
I think this means you accepted an offer from an insufficiently qualified buyer who did not have their financing together. I appreciate your experience, but this is a different situation. Those contractual safeguards exist in case a potential buyer can't qualify. Clearly this is not the case here. Apple, meet orange.

Another Reader

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Re: How much downpayment?
« Reply #18 on: March 24, 2018, 06:17:09 PM »
Yes they should ask their agent.  If you don't follow through with the contract as written it can be grounds for termination of the contract under some circumstances.  I haven't done a contract in California in 20 years, but I have in Arizona, and if you change your financing, an addendum to be signed by the seller follows.  I dumped a buyer that could not qualify for a conventional loan because the rules changed in mid-contract and her incompetent mortgage broker didn't realize it would affect his borrower.  The buyer wanted to switch lenders and go under another program for which she may or may not have qualified.  Nope.  Breach of contract and she was out.
I think this means you accepted an offer from an insufficiently qualified buyer who did not have their financing together. I appreciate your experience, but this is a different situation. Those contractual safeguards exist in case a potential buyer can't qualify. Clearly this is not the case here. Apple, meet orange.

I suspect the rules are different from state to state. As I said, I haven't signed a contract in California in 20 years.  However, I'm going to ask a couple of local agents I know that deal with a lot of cash sales what the rules are.  What you say makes some sense.  If the buyers have the cash to buy, it should not make a difference if they choose to finance as long as the deal closes on time.  There's no mortgage contingency, so they risk the deposit if they fail to close on time because they weren't really planning to pay cash.


rokel

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Re: How much downpayment?
« Reply #19 on: March 24, 2018, 08:04:30 PM »
Thanks for this. I will definitely check with my agent and lawyer, but I don't see anywhere on the contract how much we offered as a downpayment which makes me think we can change to 20% at closing but I will definitely check. Thank you