DPYM philosophy - should this also apply to saving for a down payment?

[ender]

DPYM club = dont payoff your mortgage

I am firmly in the DPYM club on my existing mortgage. We plan on moving in the next few years, likely to a place which will be more expensive than our current house.

Current home is worth ~500k or so and about 300k on the mortgage. This leaves us conservatively $150k or so in equity after selling fees, give or take a bit. But we've got a decent amount saved in cash already towards a future mortgage, too. Effectively all our cash is in 4%+ ally no penalty CDs, mostly 4.75%. All these savings are in addition to what I'd describe as our emergency fund.

We donate enough that we fully itemize all mortgage interest and would almost assuredly be below $750k in mortgage regardless of what property/% down we had.

It's occurring to me that anything more than 20% down towards a future place is actually blatantly a paying off the mortgage club situation. Arguably even paying 20% down could be similarly depending on PMI rates.

It seems like the logical conclusion here would be since we're already above the amount in cash we'd need for a new home purchase instead of saving cash we might as well just be investing what we'd otherwise put down.

The main counterexample I've thought through is having the cash extra in addition to our equity means we could decouple the sale/purchase from each other, giving us flexibility in closing as well as moving dates. So if we had 20% down plus our equity then we'd be able to decouple those entirely.  But the flip side is if we're putting less than 20% down we're pretty close to being able to do that as well already. This does add some risk if we can't sell our current place for whatever reason but we're pretty flush in equity there.

What else should I be considering here?

[Fomerly known as something]

Monthly payment due to cash flow considerations.  I put 35% down from rolling in previous equity on my new home.  I was willing to take out a mortgage up to a 500k loan at the 2022 market rates.  This was a monthly payment that I was comfortable going into retirement within 5 years.  If I had put down less money, I would have had to buy less of a house.  Unlike paying extra on your mortgage, where your payment doesn’t change, putting down more does change your monthly cash flow.

[sonofsven]

Due to recent changes in the loan-level pricing adjustments uou may want to increase your down payment to 26%.

[Dicey]

Monthly payment due to cash flow considerations.  I put 35% down from rolling in previous equity on my new home.  I was willing to take out a mortgage up to a 500k loan at the 2022 market rates.  This was a monthly payment that I was comfortable going into retirement within 5 years.  If I had put down less money, I would have had to buy less of a house.  Unlike paying extra on your mortgage, where your payment doesn’t change, putting down more does change your monthly cash flow.

OTOH, had you put 20% down and invested the difference, you would potentially have lots more money with which to make house payments. I'm not saying what you did was wrong, but there is another way to look at this when deciding what to do. If you did get a great "2022" rate, just socking the difference in a CD would be making you more money.

Also, putting more than 20% down doesn't move the needle as much as one would think. Redfin has a calculator embedded in every listing where you can play with the interest rates and down payment amount to see what the payment would be. It's a very useful tool.

[seattlecyclone]

Interest rates are much higher now than they were when you bought your current place. The wisdom of paying off your mortgage (or not) depends very much on the rate you're locking in. If you could go back in time and borrow $1 million at 3% fixed for 30 years that would be looking like a pretty sweet deal right now. These current rates...less so. As to your original question, yes having a higher down payment than necessary to avoid PMI etc. is basically equivalent to paying off your mortgage.

[Finances_With_Purpose]

I like the way you are thinking, beacuse these things should run the same way.  Truth is, it's more complicated though. 

A few factors:
1.  You get better rates on the whole mortgage with more down.  You'll be taking a mortgage out at 5+% to 6+%, so that's a large potential difference, even with a small change in rates.  People with a mortgage can't change that without a refi (which nobody will do at current rising rates), but you're able to change that factor.  So be sure you understand those tradeoffs - shop around and get ideas of various rates at various amounts down.  (I don't just say this: we got a nicer rate due to more equity on our last refi.)  Note someone else's suggestion of checking out 26% down. 
2.  You can't underestimate the flexibility you get, short-term, by having that 20% cash ready, so that you can do whatever will make you the most with your current home: e.g., moving, then fix-ups, then sell, versus a lease-back or other expensive measures.  It's easier to sell (and fix up) an unoccupied house.  The cash on hand here might save you money.  Especially if you can raise 20% soon, and this is all short-term.  Don't be hesitant about using cash to save/make lots of cash over the short term - you can always invest the equity after you sell.  You could save the hassle and crazy expense of a bridge loan if you have the down payment already.  (You can price out and consider alternatives, too, which are in between: E.g., buying the new home at less than 20% down, selling the old home, and then refinancing with some of the old home's equity in hand to add to the original down payment in order to remove PMI and get the lower rate then, say, in 6-9 months after you purchase.) 
3.  Cash flow: as others noted, be aware of your cash flow.  You may need to put more down to avoid having higher payments on the new home, even if that wasn't your optimal plan.  Just check the math on that, but on this factor, I assume you already have and are aware. 

Those are the big points to consider, and I don't know enough about current rates/tradeoffs to advise you further, but I would pay close attention to #1 & #2.  It's a little complicated, and, as always, having cash makes life easier.

I love not paying off my own mortgage (and am in that club), but I also love the flexibility and savings that a pile of cash gives you over the short term. 

[Finances_With_Purpose]

One pro tip: you can look up market rates at Box Home Loans, using their instant quote tool.  (I do not get anything from telling you this.)  They repackage and sell loans as soon as they make them, but they're a pretty good gauge of the market rates, and their tools let you vary things like % down payment to see how much that affects the rates and costs. 

I use it to get an idea of where the market is, although I've also done a couple of loans through them, too, and had good experiences (like them letting me keep an ultra-low rate once locked in, even after the market went back up a bit). 

It's a great tool to get a rough idea of what various scenarios would look like with your own numbers.

[ender]

1.  You get better rates on the whole mortgage with more down.  You'll be taking a mortgage out at 5+% to 6+%, so that's a large potential difference, even with a small change in rates.  People with a mortgage can't change that without a refi (which nobody will do at current rising rates), but you're able to change that factor.  So be sure you understand those tradeoffs - shop around and get ideas of various rates at various amounts down.  (I don't just say this: we got a nicer rate due to more equity on our last refi.)  Note someone else's suggestion of checking out 26% down. 

This doesn't seem to be true - using that Box Home loan tool recommended by @Finances_With_Purpose (edit: oh that's you in both posts, hah!) , I'm seeing for a price of 700k:

20% down => 5.625% with $10.4k in lender fees
10% down => 5.625% with $8.3k in lender fees
5% down => 5.625% with $8.3k in lender fees

So here, for a price of 700k it's cheaper for the mortgage at the same rate for lower down (note that 27% down still has $7k in lender fees, so it's not much cheaper than the 10% down situation).


Now, if we figure PMI is 0.2%, which is what it would have been on our current house had we gotten PMI/put 10% down, it gets trickier since you have to basically quote 5.425% which is closer to $14k in lender fees to get (14.6k gets you 5.375%, 11k gets you 5.5%) so adding in the PMI to make it equivalent.

But still, in this case you are more or less paying $4k up front to invest $70k in the market or whatever instead of locking it in your mortgage. I never quoted what PMI might look like if we did 5% down, but if it was similar that'd be $4k to invest $105k more.

There's obviously a lot of nuance here based on individual situations/loans though.

[ender]

Interest rates are much higher now than they were when you bought your current place. The wisdom of paying off your mortgage (or not) depends very much on the rate you're locking in. If you could go back in time and borrow $1 million at 3% fixed for 30 years that would be looking like a pretty sweet deal right now. These current rates...less so. As to your original question, yes having a higher down payment than necessary to avoid PMI etc. is basically equivalent to paying off your mortgage.

Even avoiding paying PMI is similar though, right? though I guess PMI is less tax deductible.

Monthly payment due to cash flow considerations.  I put 35% down from rolling in previous equity on my new home.  I was willing to take out a mortgage up to a 500k loan at the 2022 market rates.  This was a monthly payment that I was comfortable going into retirement within 5 years.  If I had put down less money, I would have had to buy less of a house.  Unlike paying extra on your mortgage, where your payment doesn’t change, putting down more does change your monthly cash flow.

The cashflow argument doesn't make sense if you are talking about whether to put existing money down vs investing. I guess it does have a psychological impact but I've never really understood how this applies in a situation like this.

I guess to some extent if you are worried about increasing AGI in retirement this could matter, but if you're close enough for this to be a meaningful consideration you will likely have minimal capital gains on the investments anyways to worry about.

[seattlecyclone]

Interest rates are much higher now than they were when you bought your current place. The wisdom of paying off your mortgage (or not) depends very much on the rate you're locking in. If you could go back in time and borrow $1 million at 3% fixed for 30 years that would be looking like a pretty sweet deal right now. These current rates...less so. As to your original question, yes having a higher down payment than necessary to avoid PMI etc. is basically equivalent to paying off your mortgage.

Even avoiding paying PMI is similar though, right? though I guess PMI is less tax deductible.

When you assign the full cost of PMI to just the portion of your loan principal you'd need to pay off to stop PMI it rarely looks like a low enough rate to entice most of us to invest instead of paying that off. Like, if you buy a $500k house and put 15% ($75k) down, and are charged 0.5% PMI on the $425k loan balance, that's $2,125/year. That cost only exists because you borrowed $25k more than a 20% down payment, so it's like an extra 8.5% rate charged on that $25k, on top of the actual mortgage interest rate. Even if you think keeping a 5-6% loan long-term is a good thing, that part you're paying ~14% on is probably not looking like a great deal.

[ender]

Interest rates are much higher now than they were when you bought your current place. The wisdom of paying off your mortgage (or not) depends very much on the rate you're locking in. If you could go back in time and borrow $1 million at 3% fixed for 30 years that would be looking like a pretty sweet deal right now. These current rates...less so. As to your original question, yes having a higher down payment than necessary to avoid PMI etc. is basically equivalent to paying off your mortgage.

Even avoiding paying PMI is similar though, right? though I guess PMI is less tax deductible.

When you assign the full cost of PMI to just the portion of your loan principal you'd need to pay off to stop PMI it rarely looks like a low enough rate to entice most of us to invest instead of paying that off. Like, if you buy a $500k house and put 15% ($75k) down, and are charged 0.5% PMI on the $425k loan balance, that's $2,125/year. That cost only exists because you borrowed $25k more than a 20% down payment, so it's like an extra 8.5% rate charged on that $25k, on top of the actual mortgage interest rate. Even if you think keeping a 5-6% loan long-term is a good thing, that part you're paying ~14% on is probably not looking like a great deal.

Oh, I guess this is an interesting way to think about it that I've not thought about before. I guess it depends entirely on the PMI charge.

[Finances_With_Purpose]

1.  You get better rates on the whole mortgage with more down.  You'll be taking a mortgage out at 5+% to 6+%, so that's a large potential difference, even with a small change in rates.  People with a mortgage can't change that without a refi (which nobody will do at current rising rates), but you're able to change that factor.  So be sure you understand those tradeoffs - shop around and get ideas of various rates at various amounts down.  (I don't just say this: we got a nicer rate due to more equity on our last refi.)  Note someone else's suggestion of checking out 26% down. 

This doesn't seem to be true - using that Box Home loan tool recommended by @Finances_With_Purpose (edit: oh that's you in both posts, hah!) , I'm seeing for a price of 700k:

20% down => 5.625% with $10.4k in lender fees
10% down => 5.625% with $8.3k in lender fees
5% down => 5.625% with $8.3k in lender fees

So here, for a price of 700k it's cheaper for the mortgage at the same rate for lower down (note that 27% down still has $7k in lender fees, so it's not much cheaper than the 10% down situation).


Now, if we figure PMI is 0.2%, which is what it would have been on our current house had we gotten PMI/put 10% down, it gets trickier since you have to basically quote 5.425% which is closer to $14k in lender fees to get (14.6k gets you 5.375%, 11k gets you 5.5%) so adding in the PMI to make it equivalent.

But still, in this case you are more or less paying $4k up front to invest $70k in the market or whatever instead of locking it in your mortgage. I never quoted what PMI might look like if we did 5% down, but if it was similar that'd be $4k to invest $105k more.

There's obviously a lot of nuance here based on individual situations/loans though.

That is odd (that the 20% down costs more in fees), however, the trend remains true.  You can use that tool, but look at all rates and don't just look at the most popular one.

At 40% down and zero cost, the 0$ rate is actually 6.375% (with net to you of $1,034 to closing).  At the next one up, which is usually where I like to land, it's 6.25% for $402.  (I would never assume, as a mustachian, that one would want to roll in that much set cost - the one-time fees - on a loan you that might hopefully only have for a year or less.  That's especially true in your case, where you hope/expect rates to drop soon and for you to refi and take advantage, rather than holding this same loan for years.)

Rates/prices got slightly better at 50% down. 

Rates/prices were actually similar at 28% down as they were at 40% down.  You can get 6% at $1,600 or 6.25% at $45.  At 20% down, the $0 rate is 6.375% (for cash-back of $710) or the next up is 6.25% at $1,200. 

So you get a $1,000 cash difference and little difference in rates for the 6.25% rate at 28% down as you do at 20% down - rates are really tight, it seems. 

So, what I see tells me that the banks are savvy and want those long-term loans on their books, so they're paying more for 30-year loans with lower equity, ironically enough. 

At any rate, I plugged in some scenarios, and I suggested that you plug in yours, because it tells you where the market is at. 

It doesn't look like you're going to get a big discount on rates for a slightly larger down payment, for whatever reason, which says more about how odd this market is.  But, at any rate, now you know how to find that out easily. 

[Finances_With_Purpose]

And yes, listen to the poster re: PMI.  The marginal rate on that is nuts until you pay it off. 

[Fomerly known as something]

Monthly payment due to cash flow considerations.  I put 35% down from rolling in previous equity on my new home.  I was willing to take out a mortgage up to a 500k loan at the 2022 market rates.  This was a monthly payment that I was comfortable going into retirement within 5 years.  If I had put down less money, I would have had to buy less of a house.  Unlike paying extra on your mortgage, where your payment doesn’t change, putting down more does change your monthly cash flow.

OTOH, had you put 20% down and invested the difference, you would potentially have lots more money with which to make house payments. I'm not saying what you did was wrong, but there is another way to look at this when deciding what to do. If you did get a great "2022" rate, just socking the difference in a CD would be making you more money.

Also, putting more than 20% down doesn't move the needle as much as one would think. Redfin has a calculator embedded in every listing where you can play with the interest rates and down payment amount to see what the payment would be. It's a very useful tool.

Not a lot?  $500 a month.  It was a personal decision.  And sometimes it’s not about making the  100% optimal financial decision.  Instead there are personal finance factions.   For me, my mortgage is “affordable” on my pension in 2025.  So yes cash flow/monthly budget was an important consideration for me.

[ender]

Not a lot?  $500 a month.  It was a personal decision.  And sometimes it’s not about making the  100% optimal financial decision.  Instead there are personal finance factions.   For me, my mortgage is “affordable” on my pension in 2025.  So yes cash flow/monthly budget was an important consideration for me.

One thing to consider is this whole thread is from someone pretty firmly bought into DPYM club, so while yes you might have made decisions to pay off much of your mortgage, I don't have the same philosophical approach.

That is odd (that the 20% down costs more in fees), however, the trend remains true.  You can use that tool, but look at all rates and don't just look at the most popular one.

At 40% down and zero cost, the 0$ rate is actually 6.375% (with net to you of $1,034 to closing).  At the next one up, which is usually where I like to land, it's 6.25% for $402.  (I would never assume, as a mustachian, that one would want to roll in that much set cost - the one-time fees - on a loan you that might hopefully only have for a year or less.  That's especially true in your case, where you hope/expect rates to drop soon and for you to refi and take advantage, rather than holding this same loan for years.)

Rates/prices got slightly better at 50% down. 

Rates/prices were actually similar at 28% down as they were at 40% down.  You can get 6% at $1,600 or 6.25% at $45.  At 20% down, the $0 rate is 6.375% (for cash-back of $710) or the next up is 6.25% at $1,200. 

So you get a $1,000 cash difference and little difference in rates for the 6.25% rate at 28% down as you do at 20% down - rates are really tight, it seems. 

So, what I see tells me that the banks are savvy and want those long-term loans on their books, so they're paying more for 30-year loans with lower equity, ironically enough. 

At any rate, I plugged in some scenarios, and I suggested that you plug in yours, because it tells you where the market is at. 

It doesn't look like you're going to get a big discount on rates for a slightly larger down payment, for whatever reason, which says more about how odd this market is.  But, at any rate, now you know how to find that out easily. 

This rate situation matches what it was for us pre-covid, too fwiw.

Our interest rate at 20% down here was higher than it would have been at 10% down, almost the exact amount of PMI.

[Fomerly known as something]

Not a lot?  $500 a month.  It was a personal decision.  And sometimes it’s not about making the  100% optimal financial decision.  Instead there are personal finance factions.   For me, my mortgage is “affordable” on my pension in 2025.  So yes cash flow/monthly budget was an important consideration for me.

One thing to consider is this whole thread is from someone pretty firmly bought into DPYM club, so while yes you might have made decisions to pay off much of your mortgage, I don't have the same philosophical approach.

I to am part of the DPYM club, but in order to afford my home on my base income from 2025-2052 I had to put a larger down payment.  You asked for what are some other considerations.  I gave you mine.