Propertyvirg…, Home Buyer in Daphne, AL

What advice can you offer on down payments?

Asked by Propertyvirgin, Daphne, AL Thu Apr 30, 2009

I understand that larger down payments make a difference in a monthly note. How much difference does it actually make? I read that a note would drop approximately $8 for every thousand dollars. Is there any truth to that?

Also, what are your thoughts on making a larger downpayment vs. investing the money? Folks say you will borrow at a rate that is less than the average rate of return on investments so why sink it into a house. I just want to get a feel for the pros and cons.

Thanks!

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Barbara Weis…, Agent, Tenafly, NJ
Thu Apr 30, 2009
The more money you put down, the smaller the mortgage. Using a 30 year fixed rate mortgage at 5.25%, the factor is 5.52 or $552 for every $100,000 of mortgage. How much you save every month depends on how much more you put down. Its basically a math problem.

The answer to your question then is $8 is not truthful; $5.52 is correct.

The real question is how much should I put down on a home to make the purchase a sound investment and maintain my cash flow so that I am not house poor. With interest rates so extremely low, it's very tempting to put little down. BUT....is this financially sound? What happens if you're laid off for a while, cut back on overtime or if you get sick? Dave Ramsey tells us to wait till we have a 10% down payment. I agree. It is never smart to be at a precarious level.

There's another issue - with less than 20% down, you must pay Private Mortgage Insurance (PMI) which is expensive and, as an insurance policy, not a write off. PMI is is often figured at 1.25% of the mortgage which is a good amount to have to spend. Plus qualifying for a mortgage with PMI is a lot tougher,

With investing, it's always good to be diversitied. If all of your money is in one house, that's not diversified. It is very tempting to mortgage as much as you can with such historically low rates but it's never smart to have all your eggs in one basket. It's not just a question of what you can earn in other investments; it's also a question of being diversified.

You have to examine what you can really do. It may be smarter to take less of a mortgage or more. It's very subjective and depends on your personal situaiton. However, taking on too much debt, having to pay large PMI fees and not being diversified is, in my view, a recipe for disaster.

If you have an accountant, ask your accountant for advice. Go to your banker and ask them. It's always a good idea to get the thoughts of professionals and you should do your own homework. If you're putting down 20% and can do 23% at a time that you can take that 3% and get a 9% yield, then that makes sense as the yield is significantly more than the 5.25% mortgage. But, if you are moving below 20% to get a higher rate of return, it may not be wise at all or even justified when you think about the cost of PMI.

Again, you have to weigh all your options and figure it out like a math problem. My overall advice always is to only make moves that are economically sound. Be careful and you'll be smiling.
1 vote
Barry Lynn M…, , Trussville, AL
Thu Apr 30, 2009
This is from a Blog I have on Active Rain

Save or Borrow a down payment for purchase of Property
The numbers do not lie if you buy now it will cost you less thease numbers are based on saving over 700 per month and who can do that these days.



Information About You and the Home You Wish to Buy
Expected Period in House If You Buy Now 30 years
Estimated Property Appreciation Rate 4.00% per year
Income Tax Bracket 27%
Pre-tax Rate of Interest on Savings 5.00%
After-tax Rate of Interest on Savings 3.65%
Number of Months You Rent Before You Buy 48 months
Current Monthly Rent $650
Monthly Real Estate Taxes $55 per month
Monthly Home Owners Insurance $65 per month
Monthly Rental Insurance $35 per month
Loan Information Buy Now Save First
Purchase Price $200,000 $233,972
Down Payment $7,000 $46,794
Loan Amount $193,000 $187,178
Interest Rate 6.000% 6.500%
Loan Term (in years) 30 years 30 years
Monthly Mortgage Payment $1,157.14 $1,183.10
Monthly Mortgage Insurance Payments $154.40 $0.00
Buy Now Loan Balance Reaches 80% of Appreciated Value in Month 43
Points 1.00% 1.00%
Other Closing Costs $2,500 $3,000
Results - Assuming a 30 Year Holding Period Buy Now Save First
Cost of Rent $86,508
Cost of Renters Insurance $4,658
Cost of Lost Interest on Down Payment $13,890 $73,907
Cost of Points Net of Tax Savings $4,235 $3,550
Cost of Other Upfront Charges $7,461 $7,738
Cost of Monthly Mortgage Payments $754,856 $614,333
Cost of Monthly Mortgage Insurance Premiums $9,449 $0
Cost of Homeowners Insurance $42,402 $33,752
Cost of Property Taxes $26,192 $20,848
Less: Tax Savings on Mortgage Interest $123,322 $111,708
Less: Increase in Property Value $448,680 $414,708
Less: Reduction in Loan Balance $193,000 $137,296
Equals - Net Cost $93,482 $181,582
Conclusions
The Cost of Saving First Exceeds the Cost of Buying Now by: $88,100
Saving First Would be the Better Choice Only if Your Monthly Rent is Less Than: ($12)


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