Author Topic: How Much To Put Down?  (Read 340 times)

MissPeach

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How Much To Put Down?
« on: July 28, 2020, 10:57:38 AM »
I'm exploring buying a property soon in a HCOL area that just seems to get worse and worse each year price wise - rent and purchasing. The NY Times calculator says I'm better off buying unless I rent the bottom of the barrel apartment (which I really don't want to do alone with a kid).

So my options are to:
- Stay where I am and leave the money in a taxable account. Rent for a 2 bedroom is about $3K. Currently I'm WFH but I can bike when we return but walking is a bit far. Kiddo's school is half way so I would drive some days.
- Move to an apartment closer to work where I could walk to work
- Move a 10 minute drive away and buy or buy close to work and be unhappy with what I can afford there

I'm leaning towards option #3. Just not is a question of budget and down payment. I was initially going to put down 20% cash from a taxable purchase at a higher expense ratio (before I knew what I was doing). I'm wonder if it's worth it to put more down to keep my month expenses lower so I can re-save and have a lower FIRE number? I have about $300k in the taxable. Each 100K should take off about $500 on the mortgage. Looking at around $500K and likely will have a small HOA since I can't afford single houses here.
« Last Edit: July 28, 2020, 10:59:19 AM by MissPeach »

RWD

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Re: How Much To Put Down?
« Reply #1 on: July 28, 2020, 12:00:08 PM »
I'm leaning towards option #3. Just not is a question of budget and down payment. I was initially going to put down 20% cash from a taxable purchase at a higher expense ratio (before I knew what I was doing). I'm wonder if it's worth it to put more down to keep my month expenses lower so I can re-save and have a lower FIRE number? I have about $300k in the taxable. Each 100K should take off about $500 on the mortgage. Looking at around $500K and likely will have a small HOA since I can't afford single houses here.
Putting more down to have a lower payment doesn't lower your FIRE number. It just moves around where it is allocated. The payment itself doesn't matter from a required stash perspective. Because the loan length is finite you typically only need enough to cover the remaining balance of the mortgage. So putting more down just means less you can invest.

There are other reasons to try and lower the payment, however. Once you are retired and drawing on retirement accounts if the amount needed to cover the mortgage is high it can push you up into higher tax brackets and/or disqualify you for subsidies. Though there are ways to mitigate this (e.g. refinance at retirement).

We personally put down 20% for our last house. It's a good number to avoid being upside down and avoiding MIP/PMI payments while still using the power of leverage.

MissPeach

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Re: How Much To Put Down?
« Reply #2 on: July 28, 2020, 02:47:47 PM »
I don't look at my home equity as part of my FIRE number since it's not liquid and can't easily be used to cover living expenses. I was mainly looking at purchasing as a way to hedge against the 5-10% annual rent increases around here. At the current rent rates, the NY Times rent to buy calculator says I'm at an advantage buying even with the high prices.

Having a lower payment will help as I would put it into savings but the opportunity cost is losing out on the market gains.

I have a kiddo I share custody of so I'll be here at least 6 years to stay close to XH. I think it will be closer to 10 since kiddo is leaning towards staying local for college and I'll be in areas that would be an easy commute.

My current expenses are $60k/annually but that includes a really large support payment which will go away in a few years. The difference I would save is enough to fund my portion of kiddo's college. I was looking to retire around when my support obligation finished. Kiddo would be near finishing high school or starting college at that time. My expenses would go down to just under $40k after the support obligation if I can keep the mortgage and other home expenses at 2,500/month. It will probably go down more once kiddo is an adult and can pay for their own things more.

At my current cash/savings rate I am looking at having $1.5 million at that time which (at 4%) would be able to displace the $60K in expenses. That will give me a cushion for inflation and college costs. Taking that money towards the down payment will delay my FIRE date potentially. But it will allow me to lower the amount needed potentially for my stache and save more each month.

I don't plan on paying off the house. I mainly want to get my costs more fixed. I am considering at some point moving out of the area and could use that equity towards something else. I could pay cash for a house if I move to be with family after. But I want to be covered from cost inflation in case I don't move or decide on something else.

I will likely work on a few side hustles so probably won't truly FIRE and hopefully can cover my living expenses so I don't HVE to draw right away but want that flexibility as a lot of things on my bucket list don't pay well.
« Last Edit: July 28, 2020, 02:52:01 PM by MissPeach »

StashingAway

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Re: How Much To Put Down?
« Reply #3 on: August 01, 2020, 01:35:23 PM »
I don't look at my home equity as part of my FIRE number since it's not liquid and can't easily be used to cover living expenses.

That response seems a little off to me. You either put more money down and have lower monthly expenses, or you put less money down and assume that your gains in the stock market from the difference will make up for it. Neither have anything to do with your home equity (unless you are doing a reverse-mortgage in your FIRE plans).

I don't think anyone is suggesting that your home equity has anything to do with FIRE. Everything has to do with cashflow.