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I'm starting to consider buying a home in a year or three. I'll have a lot of money available at that time -- perhaps enough to do more than the standard 20% down payment. I might be able to manage something more like 30-50% (depending on exactly how well things play out and how long I wait).

Should I pay more than 20% for a down payment? What are the advantages and disadvantages? What sort of factors (tax brackets, risk tolerance, state of local real estate market, etc) should influence my decision one way or another?

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    If you can get to 50%, could you wait until you had 100%? That would be the best of all worlds (if possible) – MrChrister Apr 16 '10 at 19:21
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    Yes, 100% would be best! – Mike Apr 16 '10 at 20:00
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    As for whether I can wait until I get to 100%, that's tricksy. A lot of my awesome stock option gains aren't likely to repeat themselves. (p.s. yes I am liquidating them.) – user296 Apr 16 '10 at 20:27
  • With the current low rates, you might be much better of borrowing as much as possible and putting your money in a well diversified portfolio of stocks, and maybe short term bonds. – JDelage Nov 4 '11 at 20:37
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    @Ramy Four years on from the original post, a lovely girl has invited me to run away with her, so I'm trying to relocate to Berlin (or somewhere else in Europe where they do a substantial amount of business in English in the technology sector and have sane work visas for US citizens). Fortunately, I have a substantial amount of savings available to help make this happen. :) – user296 Oct 11 '14 at 16:23
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The more you put down now, the less money you are borrowing.

30yrs of interest adds up. Even paying a small amount at the beginning of the mortgage can turn into a huge savings over the life of the loan. That's why you'll find advice to make extra mortgage payments in the beginning.

The question is: Do you have a better use for that money?

In particular, do you have any higher-interest debt (higher APR than your mortgage) that needs to be paid off? You generally want to take care of those first.

Beyond that can you invest the extra down payment money elsewhere (eg stock market) and get a better return than your mortgage rate? (don't forget about taxes on investment profits). If so, that money will do more good there.

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    Keep in mind that investing the extra down payment money in the stock market is not without risk. msemack is right that you can sometimes make more money investing in the stock market than paying down housing debt, but you can lose that money as well. – CrimsonX Aug 25 '10 at 14:20
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One big factor that no one has mentioned yet is whether you believe in a deflationary or inflationary future. Right now, we are leaning towards a deflationary environment so it makes sense to pay off more of the debt. (If you make just one extra payment a year, you will have paid off your house 7 years early). However, should this change (depending on government and central bank policy) you may be better off putting down the very minimum.

In a year or three from now, you should have a clearer picture. In the meanwhile, here is a recent Business Week article discussing both sides of the argument.

http://www.businessweek.com/magazine/content/10_28/b4186004424615.htm

  • +1 for bringing up the expectations on inflation / deflation, but you are wrong to say that we're heading towards deflation. The rates are currently very low by historical standards; they're much more likely to go up than down over the next 15-30 yrs. – JDelage Nov 4 '11 at 20:41
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    It is now 2015 and this graph of actual mortgage rates over the past 5 years says I was right, the rates have only gone down: bankrate.com/funnel/graph/… – RADA Oct 2 '15 at 15:00
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First of all, realize that buying a home isn't really an investment. It is cheaper to rent. In recent years, people were able to sell their houses for astronomical profits, but that won't be happening much in the future. Additionally, there are many hidden costs of owning a home.

Regarding the mortgage interest tax deduction, don't buy a house just to get this. It is like spending $1 to get back some amount of money less than $1. So just keep that in mind.

Are you debt free? If not, pay off your other debts before buying a home. I follow the advice of Dave Ramsey, so I'll echo it here. Make sure you have an emergency fund and no debt.

  1. Save $1000 for a starter emergency fund.
  2. Pay off all of your debt except your house (credit cards, student loans, cars, etc).
  3. Save 3-6 months worth of emergency fund (take into account your future mortgage payment).
  4. Save 15% for retirement.

At this point I think you are ready to buy a house. When you do, put down as much as you can; above 20% if possible. Then get a 15 year fixed rate mortgage.

At this point, start saving for your kid's college (if you believe in that) and paying down your home.

Having no mortgage is a dream many people never have. I cannot wait until I have no mortgage. Don't get suckered into getting a high priced loan. Pay down as much of the price of the house as possible up front. This gives you flexibility too. What if you need to sell quickly? Well, you will have equity from the get-go, so this will be much easier.

Good luck with your purchase!

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    It's inaccurate to say "it's cheaper to rent" without any qualifiers. Depending on the area, if someone plans to stay in one place for an extended period of time, owning can cost less than renting. While there are additional costs to home ownership, there are benefits as well. Particularly with fixed-rate mortgages, your regular monthly out-of-pocket costs stay the same for the duration of the loan. This isn't true of rent. – Scott Lawrence Aug 23 '10 at 13:42
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    @Scott I agree; see the NYTimes Rent-or-Buy calculator to help you decide. – Pete Aug 23 '10 at 18:09
  • Great link! I remember looking at quite a few calculators like this one when making my own rent vs. buy decision in 1998 (went with "buy", and I'm fortunate it worked out well). – Scott Lawrence Aug 23 '10 at 19:42
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The primary reason to put 20% down on your home is to avoid paying PMI (private mortgage insurance). Anyone who buys a house with a down-payment of under 20% is required to pay for this insurance (which protects the lender in case you default on your loan). PMI is what enables people to buy homes with as little as 3-5% down.

I would recommend against paying more than 20%, because having liquidity for emergency funds, or other investments will give you the sort of flexibility that's good to have when the economy isn't so great. Depending on whether the house you purchase is move-in ready or a fixer-upper, having funds set aside for repairs is a good idea as well.

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I'd stick with 20% down. Truth is - we don't know enough about you. Are you single and staying that way? How is your retirement savings doing? As others asked, any other debt?

You can put 20% down, take a breath and see how it's going. I did just that, the 20%. We then had a baby, and 5 nanny-years to pay for. When she was gone, all that money went to the mortgage, and after refinancing (with no points no closing) we have 7 years to go. Just under 20 years beginning to end. During that time we've saved for college (just about fully funded) and for retirement (both with matched 401(k) accounts).

Remember, if you lose your job, a house with a lower mortgage means nothing when there's still the next payment due. But that cushion of cash can be handy.

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A few thoughts off the top of my head:

Advantages of more than 20% down:

  1. Smaller mortgage, which is more likely to be approved and makes it a possibility to get a 15 year instead of a 30 year.
  2. Avoiding interest gives you a better return rate than having your savings in a bank.
  3. You can borrow against the house via a HELOC (although I hear this is tougher nowadays).

Disadvantages of more than 20% down:

  1. Less cash on hand for emergencies.
  2. The leverage argument. You have $40k. You can pay 20% of a $200k house or 40% of a $100k house. If both go up 10% and you sell, you made $20k on the $200k house and $10k on the $100k house. IF BOTH GO UP.
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Leverage increase returns, but also risks, ie, the least you can pay, the greater the opportunity to profit, but also the greater the chance you will be underwater.

Leverage is given by the value of your asset (the house) over the equity you put down. So, for example, if the house is worth 100k and you put down 20k, then the leverage is 5 (another way to look at it is to see that the leverage is the inverse of the margin - or percentage down payment - so 1/0.20 = 5).

The return on your investment will be magnified by the amount of your leverage. Suppose the value of your house goes up by 10%. Had you paid your house in full, your return would be 10%, or 10k/100k. However, if you had borrowed 80 dollars and your leverage was 5, as above, a 10% increase in the value of your house means you made a profit of 10k on a 20k investment, a return of 50%, or 10k/20k*100. As I said, your return was magnified by the amount of your leverage, that is, 10% return on the asset times your leverage of 5 = 50%. This is because all the profit of the house price appreciation goes to you, as the value of your debt does not depend on the value of the house. What you borrowed from the bank remains the same, regardless of whether the price of the house changed.

The problem is that the amplification mechanism also works in reverse. If the price of the house falls by 10%, it means now you only have 10k equity. If the price falls enough your equity is wiped out and you are underwater, giving you an incentive to default on your loan.

In summary, borrowing tends to be a really good deal: heads you win, tails the bank loses (or as happened in the US, the taxpayer loses).

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