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I have been searching for a house and am potentially going to make my first offer. I have cash on hand to make a 15% down payment on the place in question and enough money in stocks to comfortably get that other 5% if I do some selling. My question is, how do I know if selling the stocks to make the 20% down payment is better or worse than just holding the stocks and making the 15% down payment?

I'm not concerned with PMI — that's a small expense — but I'm wondering how this will affect my mortgage rate, or if there's anything else I'm missing here. It's my understanding that mortgage rate calculations are a bit of a black box, so this may not be answerable, but I wanted to see if it was.

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    Reminder that you have to sell enough stock to get 5% after paying capital gains tax.
    – Ben Voigt
    Mar 30, 2022 at 15:00
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    Unless he is selling what he has at a loss, right?
    – heretoinfinity
    Mar 30, 2022 at 15:11
  • Being a homeowner can bring sudden unexpected expenses - what happens if the roof leaks or the boiler breaks? You might consider holding onto the stocks as an 'insurance policy' in case something goes wrong.
    – avid
    Mar 30, 2022 at 17:44

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One mistake I think you are making is that PMI is a small expense. PMI charges are based on two factors, according to a few sites I looked at, loan amount and credit score.

The key thing to note is that the difference between your actual down payment and 20% does not factor into the premiums that one pays. You would pay the same amount if you put zero down or 19%.

So is it worth paying 2.2% or so, for 5% of the mortgage? That like like financing 5% of the mortgage at 44% interest rate. As you gain equity in the home, it actually gets worse. If you have 19% equity you are financing at 220%.

It sounds like a losing game to me.

One additional benefit by having 20% or greater down is that you can also do your own escrow. Dealing with escrow companies can be a nightmare in my experience.

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  • could you clarify where you get the 2.2% and 5% and eventually 220%?
    – heretoinfinity
    Mar 30, 2022 at 14:51
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    @heretoinfinity: The 5% is the difference between the proposed 15% and 20% down payments. The 2.2% is Pete's estimate of the cost of PMI, no idea where it comes from. The 220% is the ratio of PMI at 2.2% of home value to the difference between 19% equity (paying PMI) and 20% equity (no PMI). I agree with Pete that no matter the starting down payment, you will eventually reach 19% equity.
    – Ben Voigt
    Mar 30, 2022 at 14:59
  • @BenVoigt good job on the math. The 2.2% comes from an estimate that I found online, and it was on the low side.
    – Pete B.
    Mar 30, 2022 at 15:11
  • @PeteB: The top Google results claim lower numbers, like "0.5% to 1.0% of the original loan amount, per year" or "0.25% to 2.0%". In addition to that, the difference between X% of purchase price and X% of original loan amount is also big enough to affect the 220%...
    – Ben Voigt
    Mar 30, 2022 at 15:19
  • If I'm not mistaken, PMI gets lower as your down payment gets closer to 20%. See for instance the PMI calculator at hsh.com/calc-pmionly.html
    – Michael Lugo
    Mar 30, 2022 at 15:37
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The trade-off would be paying less interest (more due to the lower principal than the rate) versus the opportunity cost of future gains in those stocks. Now, those future gains are not certain by any means, so you might be better off, or you might have missed out on gains if the stocks make more than you saved in interest. Mathematically, you'd be better off if the market does not return as much as your interest rate. If it returns more than your mortgage rate, you'd be better off leaving the investments alone.

How it affects the rate will need to be answered by the bank, but I suspect the difference wouldn't be huge.

Unless the drop in interest rate is significant (maybe a point or more) you're probably better off statistically leaving your investments alone.

A rough (but more accurate) calculation would be: Suppose you sold stock worth X to get to a 20% down payment. How would your interest rate change? Multiply the rate at 15% (R1) by the loan amount (P1), and the rate at 20% (R2) by that loan amount (P2), add in the PMI savings (PMI) and divide that difference by the amount that you'd need to sell ((R1*P1 - R2*P2 + PMI)/X). That's the rate of return that the market would have to beat to make it a bad decision to sell.

If the stocks are in a pre-tax retirement or other tax-deferred account, it's a no-brainer. The Tax and penalties alone would make selling the stocks a horrible decision just to lower your down payment.

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