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I can afford to put up to 25% down in the price range I'm looking at. Assuming average market returns and a high credit score of 800, should I always put 20% down, or should I put less? It would seem that the house's appreciation, if any, is unlikely to keep pace with average market returns so it's better to put less $ in the house and more $ in the market.

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    Would putting down 25% tap out your emergency fund? And how long do you expect to live there? What would you be doing with that extra 5% if it weren't in the house? Lastly, and most importantly, house are an expense not an investment. – RonJohn Sep 14 '19 at 0:39
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    Assuming that your use of $ means you're in the US, 20% down is generally the threshold at which you no longer have to pay for mortgage insurance. That is likely to be a savings of a couple hundred $ a month (depending on the loan amount). – Justin Cave Sep 14 '19 at 1:58
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    A country tag might be helpful. In Canada "[i]f you want to buy a home with a down payment of less than 20%, you’ll need [CMHC (Canada Mortgage and Housing Corporation)] mortgage loan insurance. " cmhc-schl.gc.ca/en/buying/mortgage-loan-insurance-for-consumers/… This would be an additional cost to carry. cmhc-schl.gc.ca/en/finance-and-investing/… The rules would, of course, be different in other countries. – C'est Moi Sep 14 '19 at 7:02
  • 20% vs. 25% also might make a difference in the interest rate if the price point is such that 20% puts you in a jumbo loan and 25% put you in a regular loan. Jumbo is usually a higher interest rate. – shoover Sep 14 '19 at 20:16
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the house's appreciation, if any, is unlikely to keep pace with average market returns

is ENTIRELY the wrong way to look at this. The house's value will appreciate (or depreciate) based on its entire value, no matter what the loan-to-value ratio of your mortgage is. An extra 5% downpayment is not an investment into real estate, it is a reduction in your leverage. Your real estate investment is the entire house no matter whether you buy with cash or borrowed money (mortgage).

What you need to weigh is the value of paying down the mortgage (which has a very predictable return based on the mortgage interest and adjusted for any change to tax deductions) vs other investments.

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It would seem that the house's appreciation, if any, is unlikely to keep pace with average market returns so it's better to put less $ in the house and more $ in the market.

This is absolutely correct. But think of it in this way: would you borrow money to invest it into stocks? If the answer is yes, then by all means, choose small downpayment and invest the rest into stocks.

If you on the other hand would not invest borrowed money into stocks, then no, don't invest, put all you can into the downpayment (sans a small emergency fund).

However, you shouldn't consider the house price appreciation or lack of it. You should consider your interest rate or lack of it. For example, I have invested money into stocks because the interest rate is below 1% for all of the loans I have used for investing purposes.

I would never ever invest into stocks with a loan at a rate of 5% or more.

Once you buy the house, it's fully yours. It's not the bank's house. It's your house. If its price appreciates, you benefit, not the bank. If its price crashes by 80%, you lose, not the bank (or well, if you become unemployed at the same time the price crashes by 80%, the bank can lose too, but the banks probably are very good at estimating risks and have considered this scenario already).

So, it's the interest rate of your loan that determines whether small or large downpayment makes sense. It's not the appreciation, lack of appreciation or depreciation of the house price.

As a general reminder: unless you are going to invest money into repairs and improvements, it is more likely the real price of your house depreciates than appreciates. After all, consider waiting 1000 years. Then you (or your children of your children of you children of ... your children) have a 1000 year old house. (Or more likely, they have just the land the house was built on, because the house will have been demolished.)

I wouldn't buy a 1000 year old house. Would you?

I might however buy shares of a 1000 year old company if it's still in business.

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There are three big benefits from putting 20% down:

  • PMI - if you put 20% down, you can forego Private Mortgage Insurance, which can be hundreds of dollars a month depending on the value of the house.
  • Better interest rate - having a smaller loan-to-value ratio will improve your chances of getting a lower interest rate
  • Better security - no worries about your mortgage being underwater in another housing market crash (if there is one). It also is a indication that you haven't overbought and aren't "house-poor".

It would seem that the house's appreciation, if any, is unlikely to keep pace with average market returns so it's better to put less $ in the house and more $ in the market.

You're comparing the wrong things. The house value will appreciate (or depreciate) the same in either case. You need to compare the interest rate on the mortgage to the returns you can get in the market. However, you also need to take risk into consideration. Yes, the market earns better returns on average, but there will be times when the market goes down significantly. Paying off debt, on the other hand is risk-free. If you have a long time until you need that money then yes you might be better off investing instead of paying the mortgage, but it is by no means certain.

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