For a mortgage I considered putting down
X and then said, let me reduce my interest over the life of the load by paying an addition
Y. However, when I compared the original total interest with down payment
X+Y the total savings on interest was less than
Y. This at first seemed odd to me since the general thought it more down, less borrowed, more saved.
I then decided to see what happened if I put the
Y into a CD and then paid it as a large extra payment the month after the CD came due. When I did this, the total interest paid over the life of the loan dropped significantly. I then use an extra payment calculator and noted that when if instead of making my down payment
X+Y, but just paying
Y as an extra payment in month 1 without even investing in the CD I still saved significantly on total interest.
There are other discussions on more down payment versus investing the money, but I am trying to find the flaw in my logic of putting a smaller down payment but making a huge extra payment in month 1. I've read some banks limit the total amount of extra payment you can make in a year, but if you can stay within those bounds, it seems like you can really save on interest.
The downside is that by borrowing more instead of the larger down payment your monthly mortgage bill will be higher, but if you can afford the difference monthly than it seems like a good plan as long as you get the same interest rate.
Let's use the following scenario as an example:
- House costs $500,000
- Buyer has $150,000 cash available
- If buyer puts down $100k, interest rate is 4.5 / 30 year fixed
- If buyer puts down $150k, interest rate is 4.5 / 30 year fixed
- For this scenario, lets ignore closing costs, taxes, hoa, etc. (though a more expensive loan may result in higher closing costs)
Scenario 1: Put down $150k
- Loan amount: $350k
- Monthly cost: $1,773.40
- Total interest over 30 years: $288,423.49
Scenario 2: Put down $100k, pay the extra 50k in month 1
- Loan amount: $400k
- Monthly cost: $2,026.74
- Actual number of payments at monthly cost: 270
- Total interest paid if no additional payments: $177,217.50
What are the pros and cons / and other considerations?