Let's say I have 500k in cash and would like to buy a 750k house. My burn rate (monthly spending) is around 4k per month, my income around 8k per month (after taxes, not including IRA contributions). My questions:
I understand there is no one-fits-all answer. I'm looking for personal advice, or general rules of thumb.
I'm going to answer your questions out of order.
Emergency fund: Depending on how conservative you are and how much insurance you have, you may want anywhere from 3-12 months of your expenses on hand. I like to keep 6 months worth liquid in a "high-yield" savings account. For your current expenses that would be $24k, but when this transaction completes, you will have a mortgage payment (which usually includes home-owners insurance and property taxes in addition to your other expenses) so a conservative guess might be an additional $3k/month, or a total of $42k for six months of expenses. So $40-$100k for an emergency fund depending on how conservative you are personally.
Down payment: You should pay no less than 20% down ($150k) on a loan that size, particularly since you can afford it. My own philosophy is to pay as much as I can and pay the loan off as soon as possible, but there are valid reasons not to do that. If you can get a higher rate of return from that money invested elsewhere you may wish to keep a mortgage longer and invest the other money elsewhere.
Mortgage term: A 15-year loan will generally get you the best interest rate available. If you paid $400k down, financing $350k at a 3.5% rate, your payment would be about $2500 on a 15-year loan. That doesn't include property taxes and home-owners insurance, but without knowing precisely where you live, I have no idea whether those would keep you inside the $3000 of additional monthly home expenses I mentioned above when discussing the emergency fund.
That's how I would divide it up. I'd also pay more than the $2500 toward the mortgage if I could afford to, though I've always made that decision on a monthly basis when drawing up the budget for the next month.
Mortgage qualification is typically done based on pretax income. To keep the math easy, let's assume $10K/month gross.
A well written loan allows 28% or $2800 to be used for the mortgage and property tax. Property tax varies, but 1% is the average of the 2 states mentioned. This results in $7500/yr property or $625/mo tax leaving $2175/mo. Note here - OP stated $750K house.
$2175 will finance $450K at 4%/30 years.
$2175 will finance $300K at 3.5% /15years.
Let me pause here. Facts are most important to make these decisions. Unless you're clear on gross income, which may be higher, the constraints above quickly come into play.
Once the numbers are spelled out, you may find that you are qualified to only borrow $350K based on a 30 year note. Nathan's $2500 payment was correct, but for the mortgage only. Add property tax and you'd be at $3125. You'd need a gross $11,160/mo. to meet the 28% rule.
The above discussion would render any further thoughts (of mine) moot.
As observed, there is no answer that will fit all, but below are some considerations:
Your monthly requirement is 5000, so you have 3000 left to pay the monthly instalments (EMI). However, if you do pay 3000, you will have no money left for any other activities (holidays etc.) till your EMI is finished
Set off a sum, let us say 500-1000, per month (you shall have to decide), for other expenses
The rest of the money, in this case 2000-2500, you can pay as monthly EMI
If you indicate that your monthly EMI to the bank, they will be able to tell you how much of loan you are eligible for and for how long the EMI would last. This is your benchmark
If this loan amount is 750,000 or more, you do not need to put in your own money. So the decision then becomes how fast you want to pay off your loan and as accordingly you shall utilize your 500,000
However, if the EMI will not cover a loan of 750,000 (more likely case), you have options between the following:
a. Max out on your loan that 2000-2500 EMI/month (in terms of years as well as amount) can get you and put the rest from 500,000.
b. Min your loan in terms of amount and time and put your entire 500,000
c. The middle ground is to balance between the loan and your own money, which is the best approach, there is no figure here that works for all, you have to take the decision based on your circumstances. However, in general, the shorter the loan term (in years) better it is as in aggregate you pay less money to the bank.
If you are 1-2 months away from buying the house, one exercise you could do is to keep the EMI money in a separate bank account and see how you fare with the residual cash, this would give you a good reality check.
Hope this helps, thanks
The reason to put more money down or accept a shorter maximum term is because the bank sweetens the deal (or fails to sour it in some fashion). For example, typically, if there is less than 20% down, you have to pay an premium called "Private Mortgage Insurance", which makes it bad deal.
But I see banks offering the same rate for a 15%-year mortgage as for a 30-year one, and I think: fools and their money. Take the 30-year and, if you feel like it pay more every month. Although why you would feel like it, I don't know, since it's very difficult to get that money back if you need it.
How much should my down payment be? Ideally 20% of the purchase price because with 20% of the purchase price, you don't have to pay a costly private mortgage insurance (PMI). If you don't have 20% down and come across a good property to purchase, it is still a good idea to go forward with purchasing with what you are comfortable with, because renting long term is generally never a good idea if you want to build wealth and become financially independent.
How much should I keep in my emergency fund? People say 3-12 months of living expenses. Keep in mind though, in most cases, if you lose your job, you are entitled to unemployment benefits from the government.
How long should my mortgage be? 30 year amortization is the best. You can always opt to pay more each month. But having that leverage with a 30 year loan can allow you to invest your savings in other opportunities, which can yield more than mortgage interest.
Best of luck!
