I am 23 with no debt and planning on purchasing a house. I've been running through many hypotheticals and decided to post an example to see what others think since this is a significant decision. I am looking at a $200k home, conventional, and currently have $40k (20%). I am considering leaving $10k of that $40k separate for a small emergency fund and other expenses (closing costs, inspection, etc.). Assume I have $500 each month to put towards extra principal on mortage or mutual funds.
Option 1: If I put most of the money towards down payment, e.g. $30k (15%), I am significantly close towards removing PMI (~$75/month), and have less interest to pay per month (~$60/month less, based on 3.5% interest rate).
Option 2: If I put part of the money towards down payment, e.g. $10k (5%), I can place part into mutual funds, e.g. $20k, and be earning money on that ($133.33/month, avg based on 8% return in 1 year / 12 months).
Is option 2 the way to go? How do taxes from mortgage/investing play a role and do they make a dent in either option? Since this is a significant purchase, is there anything I've overlooked?
This question from 2011 resembles what I've put here, but I have never invested nor know the costs and taxes associated with investing (though I have read up a bit on stocks and mutual funds).