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Proper 2BRs start at $500k in our neighborhood. We're looking at buying, but I'm leery of the $100k downpayment. It would reduce our savings to 50k liquid and 75k in retirement.

I can easily afford just putting down 5% and paying the extra interest rate and PMI. However, is this a smart thing to do? I have the nagging feeling that the extra $400/month or so is just being wasted. I would probably just put in extra principal each month to get it above 80% and then get rid of PMI and potentially refinance.

However, I balance that with the realities that low stock market returns (negative this year), bond yields, and money market yields mean that my brokerage account is not taking advantage of the extra savings.

TL;DR: $100k downpayment reduces liquid cash to 50k. Buy now with 20% down, buy now with 5-10% down and take a higher interest rate/PMI, or wait 2-3 years to save up another 75k liquid?

  • 3
    How long will $50,000 last you if you lost your income? – user296 Aug 26 '10 at 14:26
  • I could probably stretch it a year with unemployment and by cutting unnecessary expenses. – Jim Aug 26 '10 at 17:11
  • Have you looked at FHA loans? The PMI is partially offset by the lower rates available with FHA products. – Portman Aug 30 '10 at 3:58
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I'm of the belief that you should always put 20% down. The lower interest rate will save you thousands over the life of the loan. Also PMI is no different then burning that much cash in the fireplace every month.

From Wikipedia

Lenders Mortgage Insurance (LMI), also known as Private mortgage insurance (PMI) in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.

You are basically paying money each month for the bank to be insured against you not paying your mortgage. But in actuality the asset of the condo should be that insurance.

Only you can decide if you are comfortable with having $50k in liquidity or not. It sounds like a good cushion to me but I don't know the rest of your expenses.

  • I'm not sure why this is rated highly. I wasn't asking whether the home was worth $500k or not. It's unlikely that I'll hit the bottom either way because it's a) been hit already last year b) has yet to be hit when prices likely weaken again later this year. – Jim Aug 26 '10 at 17:05
  • @Jim. Correct about the part on value of the house. However I think the rest of the answer is relevant so I am leaving it. – mpenrow Aug 26 '10 at 17:49
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As I've crunched numbers towards what my family could afford for a down payment (in an area with similar housing costs - don't you hate that high cost of living?), I've come up with the following numbers:

  • Six months of living expenses at our projected budget with housing costs included (right now our housing costs are significantly cheaper than they will be after the home purchase) plus a bit more per month. This is a comfortable, maybe even excessive pad, as my monthly budget includes savings that wouldn't really be "savings" in this case.
  • 10K in home repairs, since they say to have 1 to 2% of your home value available for that. Even in a condo where the intense association fees cover the outside you still have to handle things like appliances breaking. You also might want to allocate that money towards if the condo association suddenly decides you owe 10K to update the balconies, which I've heard of happening.
  • Money towards a new car, as one of our 2 cars is 20 years old and we can't count on it any more.
  • Full closing costs. Remember that on $500K that's going to run you around $10K according to what lenders have told us in our area.

We may be missing some area of expenses, but in general I think we are being fairly conservative. You should consider making a similar list to determine your comfort level.

Spend some time with an interest calculator to know the serious pain of each dollar you are paying interest on to a lender.

Also know that the bigger your down payment, the more likely the seller is to accept your offer. It shows you are serious.

  • I've bought and sold a couple of houses and don't remember the down payment being information that was exchanged between the buyer and seller. Down payment was something the bank dealt with. Is this a different practice in different areas? – bstpierre Aug 27 '10 at 16:44
  • @bstpierre - I don't know, as I've not yet purchased (but am sitting on an around 30% down payment). My realtor, who is the most forthright buyer's agent I've ever dealt with, says it does. It may be the case that a strong down payment is something you incidentally include in a contract, I don't know. I do know that I've heard of sellers ignoring contracts with FHA loans due to the difficulty of FHA appraisals, though. – justkt Aug 27 '10 at 16:53
  • I think what your broker was referring to "earnest money" which is usually a check submitted with your offer to show you're serious about buying the property. If they accept your offer the earnest money goes toward the down payment and closing costs, otherwise you get it back. – Bryan Anderson Aug 30 '10 at 22:34
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    @Bryan, @bstpierre - having written up a contract recently, I can now say with certainty that the standard contract for my area does have the agent list down payment versus loan amount broken out, as well as earnest money. A big down payment helps to indicate how easy financing will be to get, making the sale more of a sure thing. – justkt Nov 4 '10 at 17:25
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The simple answer is yes - put 20% (or more) down.

In the past I have paid PMI and used a combination first and second mortgage to get around it. I recommend avoiding both of those situations. I am much more comfortable now with just a regular mortgage payment. The more equity you have in your home the more options you will have in the future.

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If you already have the money, put the 20% down but here is another option:

You can put whatever you want down...Let's say 10%. For the other 10%, take out a 2nd mortgage. This enables you to avoid PMI.

The rate you will get on the second mortgage will be higher than the first but the combination of 2 mortgages may be less than 1 plus PMI.

When you get to 20% equity you can refinance and consolidate to one lower rate mortgage without PMI.

  • 1
    while this can be a very viable option (I know people who have used it), in the current financial climate in the US lenders almost always won't allow it, as it's part of what caused our current issues with housing. – justkt Aug 27 '10 at 12:29
  • The current financial climate also pays very low amounts of interest. If you have the cash, you're guaranteed to pay ~4% in interest on the loan, while you're unlikely to get that much interest from savings or bonds, or even a sideways stock market. – SpecKK Aug 29 '10 at 8:35

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