Author Topic: Is there a sweet spot for down payment on a primary residence?  (Read 7228 times)

lucasw

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I'm curious if there is the perfect percentage to put down on a house that strikes the right balance from a mustachian perspective? I have a tough time believing that a mortgage is better than being debt-free in my current situation, but I get the math. I'm fortunate enough have a wide range of options. Three general options I'm considering...

A) 50% down, 15-year mortgage, using cash in hand from recent home sale as the downpayment. Aggressively paying down until it is gone in 4 years.
B) 20% down, 30-year mortgage, investing the remaining cash and future cash in index funds, paying the mortgage for 15-years.
C) Cashing out 25% of my total other investments, writing a check for the entire house now. Investing income from next four years into index funds, etc.

I'm 40 year old, with a wife and two young kids. The goal is to downsize the career as the kids are entering school. There is a chance I could be out of work sooner rather than later, but I'll likely be highly employable for at least another 5 years. So my concern about my income over the next 4 years is mild to "somewhat". Any guidance? 

rubybeth

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #1 on: March 21, 2016, 01:16:52 PM »
I would not put more than 20% down. Now, as to the 15 vs. 30 year mortgage, it will depend on your interest rate and if you can honestly invest the difference. Play around with this calculator: http://michaelbluejay.com/house/15vs30.html

Others who actually have mortgages will likely chime in. :)

PadAdventure

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #2 on: March 21, 2016, 01:22:12 PM »
I agree with rubybeth, but curious what the others have to say.

Right now interest rates are so low, and the more liquid cash capital will be of more use to you if there's a career or life blip

It seems like keeping the payments low, long term, and paying down principle without being committed to it seem the route from what you've stated.

You could still make additional payments to the principle, or pay down at an accelerated rate, but without the commitment (ie tailor it to your life events fluidly)

But a true sweet spot?  Now, that I am not sure of.  I assume the answer would be like the one given, "it depends"

And I have more than one mortgage :)
« Last Edit: March 21, 2016, 01:43:38 PM by PadAdventure »

asiljoy

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #3 on: March 21, 2016, 01:55:45 PM »
For us, we just had other priorities. We're still pretty far out and got a lower interest rate than we were expecting, so we went with as little as we can put down and have funneled the excess into HSA's/saving for hypothetical baby number 2's maternity leave/retirement accounts. But we're still at least 15 years from retiring, and unless something changes, I doubt we'll make any bulk payments until then. Even then, I'm not really sure it makes sense given the interest rate, but 15 years is a long time and who knows what will happen between now and then.

AlanStache

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #4 on: March 21, 2016, 02:07:15 PM »
do the math.  But I dont really like that I got a 15 year as it locks me into higher payments and in that way restricts my options even it I do end up paying less or am done with it earlier.

zephyr911

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #5 on: March 21, 2016, 02:07:35 PM »
Vastly diminishing returns above 20% DP. Dump the rest in the market and keep accumulating.

Abe

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #6 on: March 21, 2016, 02:11:53 PM »
One mortgage here (but second time I've bought a house). Putting 20% down usually avoids mortgage insurance and thus a cost saver in the long run. I have a hard time seeing any advantage from putting 50% down unless you've maxed out your retirement accounts, your kids' college saving accounts, minimized your recurring expenses, and paid down any outstanding consumer debt. Say you haven't done the above, but do go ahead and put 50% down. Paying off the house quickly will protect you from foreclosure/eviction if you lose your job in 5 years. If you are concerned about job loss resulting in homelessness, I think then it's a valid point. However, there is the opportunity cost from not investing, and those potential interest earnings would be helpful if you are unemployed in the future.

If, in several years, you have enough to support the family after retiring, and have done the above to maximize your tax deductions, then go ahead. You'll lose some several thousands of dollars over the long term if your investments do well, but that probably won't affect your lifestyle. If your investments do poorly, then you may save a small amount of money that otherwise would've been lost & it again won't affect your lifestyle.

Thus, if you are in a precarious job situation and want to secure housing for your family in the long run, consider paying the mortgage quickly. However, most people who would benefit from this scenario probably don't have the money to do so, and conversely most people who could do so probably will have minimal benefit from it.

I'm about 10 years behind you in age and family situation. My plan is to get a 30 year mortgage to keep payments low, maximize tax-advantaged accounts, and put the rest of the savings in taxable accounts (all in index funds). If the kids are set up for their college, and we have sufficient savings to retire, then we'll probably pay the mortgage to get it off our books. This is with the understanding that it'll cost me some (hopefully trivial) amount of money over the next several years.
« Last Edit: March 21, 2016, 02:16:04 PM by Abe »

lucasw

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #7 on: March 21, 2016, 02:36:00 PM »
Thanks for jumping in. The challenge I have is this... after looking through the various sites, they all seem to say the following: 20% down on a 30-year loan BUT also, pay it off early. There isn't a huge difference between the interest rates on a 15-year compared to a 30-year. I'm wrestling to understand why it's better to "owe more and scramble to pay it off" than to "owe less and scramble to pay it off". My plan is to reduce my expenses by removing the mortgage payment in the next 4-5 years. Just paying the 30-year loan would have me working until I'm 70.   

life is short

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #8 on: March 21, 2016, 02:41:25 PM »
Thanks for jumping in. The challenge I have is this... after looking through the various sites, they all seem to say the following: 20% down on a 30-year loan BUT also, pay it off early. There isn't a huge difference between the interest rates on a 15-year compared to a 30-year. I'm wrestling to understand why it's better to "owe more and scramble to pay it off" than to "owe less and scramble to pay it off". My plan is to reduce my expenses by removing the mortgage payment in the next 4-5 years. Just paying the 30-year loan would have me working until I'm 70.   

If you had the money to pay off the mortgage in 4 or 5 years you're better off investing that money and making the minimum payments on a 30 year mortgage if the interest rate is low (<4% probably). There's no reason having a 30 year mortgage would require you to work for the duration. It's just another monthly expense that could be accounted for. The idea is that you'll actually come out ahead by having that money invested and reaping the difference in returns (~7% real) vs the interest on your mortgage. ie leveraged debt

tomsang

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #9 on: March 21, 2016, 03:36:54 PM »
If you have a low fixed rate mortgage with no PMI, then I would say the answer is 0% down.  Typically, if you are paying PMI, then it makes sense to put down to avoid that expense.  You probably need to do the math and ask the lender what options are available and then do the math.

You can read a lot on the pros and cons of paying off a mortgage early here. http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

zephyr911

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #10 on: March 21, 2016, 05:16:28 PM »
Said above already, but you don't need a paid-off house to retire. I plan on having mortgages on multiple properties when I quit for good. I also plan on having more than enough cash flow to cover them, which I'm setting up right now for a lot less than it'd cost to pay everything off.

rubybeth

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #11 on: March 22, 2016, 07:49:04 AM »
Thanks for jumping in. The challenge I have is this... after looking through the various sites, they all seem to say the following: 20% down on a 30-year loan BUT also, pay it off early. There isn't a huge difference between the interest rates on a 15-year compared to a 30-year. I'm wrestling to understand why it's better to "owe more and scramble to pay it off" than to "owe less and scramble to pay it off". My plan is to reduce my expenses by removing the mortgage payment in the next 4-5 years. Just paying the 30-year loan would have me working until I'm 70.   

Did you run the 15 vs. 30 year mortgage calculator on this page, toward the middle of the page? It's not the one at the top of the page, it's the "Take the 30 and invest the difference" calculator: http://michaelbluejay.com/house/15vs30.html 

The idea of having a 30 year mortgage is that you lock in that price for the next 30 years. If you want to retire during that time, fine, it's just much easier to estimate your monthly obligation, and in the meantime, you have more cash free (i.e. not wrapped up in your house) to invest and make additional money.

If your interest rate on the 30 year mortgage would be 4% and on the 15 would be something like 3.8% and you assume you'd get an 8% return by having your cash in investments, with 3% inflation, you can play around with the numbers--on a $200,000 house with 20% down, you come out ahead by $170,000 with the 30 year loan. If you get a windfall like an inheritance or investments do particularly well in a given year, of course you can always sell some investments and pay off the house earlier, but otherwise, your money isn't "working" as much for you by being wrapped up in your dwelling as it would be in investments.

I know that some people really like the idea of just owning their house with no mortgage, and that's fine, but you asked what was MMM "optimal" and that's the answer you're getting. Optimal is having more money to invest.

lucasw

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #12 on: March 22, 2016, 12:38:19 PM »
I give. I don't like it but the 30-year makes more sense. Thanks everyone! Here's to perma-debt! 

Bicycle_B

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #13 on: March 22, 2016, 12:47:05 PM »
I give. I don't like it but the 30-year makes more sense. Thanks everyone! Here's to perma-debt!

Logical response, Lucasw.  If it makes you feel better, this situation doesn't always happen.  It's partly a result of low low low rates on mortgages right now.  Such profligate-sounding behavior as perma-debt isn't always so well rewarded.

rubybeth

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #14 on: March 22, 2016, 01:18:15 PM »
I give. I don't like it but the 30-year makes more sense. Thanks everyone! Here's to perma-debt!

Logical response, Lucasw.  If it makes you feel better, this situation doesn't always happen.  It's partly a result of low low low rates on mortgages right now.  Such profligate-sounding behavior as perma-debt isn't always so well rewarded.

Right, if your interest rate on the house were higher than the investment returns, then you'd come out ahead by paying off the house. Or if it were roughly similar, like 6% on the house and 8% on investments, but right now, mortgage interest rates are pretty darn low.

Gone Fishing

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #15 on: March 22, 2016, 01:34:23 PM »
Sol made one of the best cases I have seen for paying off a mortgage here:

http://forum.mrmoneymustache.com/ask-a-mustachian/should-i-pay-off-my-mortgage-early/

which basically came down to tax strategy (minimizing income to maximize benefits).  Personally I'm in the 20% down/30 year term camp as I would rather gamble on global economic growth than on congress's ability to keep the ship on a straight course when it comes to the tax code.

For many, especially during their working years, paying off a mortgage is basically saying you don't expect any other possible investment to return more than 2-3% (current mortgage rates less potential tax benefits) over the term of the loan which is a pretty pessimistic for a group that is supposed to be optimistic! 

redbirdfan

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #16 on: March 23, 2016, 12:00:55 AM »
I think the sweet spot is putting 0% down with no PMI.  Check out your local credit union.  Most have a 5/5 ARM option that gives you 100% financing with no PMI with no prepayment penalties.  Keep your cash liquid and your required monthly payments low.  Most 5/5 ARM starter rates are around 3%.  The max increase when it resets is 2% with a max lifetime increase of 5%.  This means that over the first 10 years your average rate (if it resets to the max allowed) is 4%.  Keep in mind that if you pay it down aggressively before it resets you will be paying a maximum of 5% on a reduced balance.  I think it's the best option around for Mustachians who won't use the option as an opportunity to buy too much house.  You can ALWAYS put more money into the house but you can't generally get it out of the house for free.  Just my $.02 after running the numbers.

ender

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #17 on: March 23, 2016, 06:24:06 AM »
I think the sweet spot is putting 0% down with no PMI.  Check out your local credit union.  Most have a 5/5 ARM option that gives you 100% financing with no PMI with no prepayment penalties.  Keep your cash liquid and your required monthly payments low.  Most 5/5 ARM starter rates are around 3%.  The max increase when it resets is 2% with a max lifetime increase of 5%.  This means that over the first 10 years your average rate (if it resets to the max allowed) is 4%.  Keep in mind that if you pay it down aggressively before it resets you will be paying a maximum of 5% on a reduced balance.  I think it's the best option around for Mustachians who won't use the option as an opportunity to buy too much house.  You can ALWAYS put more money into the house but you can't generally get it out of the house for free.  Just my $.02 after running the numbers.

To me the biggest advantage of putting significant money down is you buy a smaller house.

These assumptions all are implicitly operating under the "for a specific home, how much down should you put?"

If you have 50k and plan to put 20% down you have a fixed upper bound on price. While all of us will likely think we're not going to inflate what we buy without any constraints, I suspect that many people without a firm upper bound provided by their allocated cash end up spending somewhat more.

Drifterrider

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #18 on: March 23, 2016, 06:49:57 AM »
I bought my primary residence with a VA loan.  No down payment but there is a VA funding fee and sometimes VA loans have higher interest rates.  I have a 30 year.  I can always pay ahead to cut the term and pay less interest but I'm not tied to higher payments a 15 would bring me.

My rental I paid with cash.  No debt.

If I could have afforded to buy my primary outright, I would have done so.  I don't like debt and don't buy into the "but it is a tax deduction".  I'd rather pay the 20 cents tax to avoid the $1 interest.

redbirdfan

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #19 on: March 23, 2016, 07:19:48 AM »
OP,

How soon would you be downsizing?  Does your wife work or is there a chance you will not have any household income in 5 years?  I would still opt for the no money down, no PMI 5/5 and aim to make a large dent in the balance with monthly cash flow.  Don't inflate your home purchase.  Take the net proceeds from selling your home and invest it with a 60/40 AA or play it safe and put it in several Netspend/Mango accounts earning 5% apiece.  I would avoid having the house make up a higher percentage of your net worth if you are anticipating being unemployed in the near future.   

I'm a red panda

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Re: Is there a sweet spot for down payment on a primary residence?
« Reply #20 on: March 23, 2016, 07:55:11 AM »


To me the biggest advantage of putting significant money down is you buy a smaller house.

These assumptions all are implicitly operating under the "for a specific home, how much down should you put?"

If you have 50k and plan to put 20% down you have a fixed upper bound on price. While all of us will likely think we're not going to inflate what we buy without any constraints, I suspect that many people without a firm upper bound provided by their allocated cash end up spending somewhat more.

How do you decide how much to put as your down payment though?
So you still have to set your limit somewhere, whether it be down payment or house price.   We set ours on house price; as we had a lot of cash available, and if we just looked at what we could pay 20% off we could have gone WAY higher than we wanted to spend.