9

I know I should X months of cash for emergencies (I've seen X range from 6 to 24, depending on who's giving the advice).

But in addition to that, is there any generally accepted rule for how much of my non-retirement savings/investments should go towards a down payment if I have no other expenses?

I assume I will want to save some of it for things that aren't necessarily unexpected but I don't know about now (e.g. maybe I have a kid in 4 years).

  • Some mortgages allow you to take money out again if you need it (often linked to a savings account with the same bank you have the mortgage with). In such a case every last penny / cent you have should go against paying off your mortgage. – user3377 May 2 '11 at 23:31
  • If you're asking how much downpayment vs. how much to get as a loan, money.stackexchange.com/questions/7972/… may be a relevant question – Havoc P May 3 '11 at 2:02
5

I'd suggest you put only 20% down if you qualify for the 80% amount of the mortgage. Live in the house a year and see what expenses really are. Then if your non-Ret accounts are still being funded to your liking, start prepaying the mortgage if you wish. It's great to start with a house that's only 50% mortgaged, but if any life change happens to you, it may be tough to borrow it back. Far easier to just take your time and not make a decision you may regret. You don't give much detail about your retirement savings, but I'd suggest that I'd rather have a large mortgage and fund my retirement accounts to the maximum than to have a paid house and start the retirement account at age 35. Some choose that option.

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10

My spouse and I have our non-retirement savings in the following mental categories while house shopping:

  1. Closing costs: about 2% of the house in the US, which can be significant in high cost of living areas
  2. Emergency repair fund: about 2% of our expected purchase value so that if something breaks immediately after purchase we are covered
  3. Next car fund: so we don't ever have to have a car loan again and can therefore assume we won't have that monthly expense in our budget
  4. 6 month cash emergency fund: covers six months of expected costs once the house is purchased
  5. Whatever's left over is for the down payment

You will absolutely need 1. I highly recommend 4 & 2. 3 is a personal choice.

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  • 2
    I'd go further and suggest that 2 is also almost a necessity - there will be something wrong that the home inspector missed that'll turn into an urgent repair. Ask me how I know... – Timo Geusch May 2 '11 at 20:50
3

Given that you have your emergency fund, and no other high interest rate debts (credit cards, etc.) you will want to put down at least enough to not have to pay Private Mortgage Insurance (PMI). PMI is solely to protect the lender if you default. It has no benefit to you. It generally means that you will need at least 20% down. After that, its a personal decision, depending on what else you are going to do with the money. If you are the type to spend money frivolously if you have it, it might make sense to put as much down as you can. If you think that you can invest the money and over the long-term make more than the historically low mortgage interest rates, it might make sense to invest.

One thing to keep in mind is that money that you put into the down-payment is relatively illiquid, meaning that it is hard to turn back into cash. If you have large expenses in the future, like health problems or college for the kids, it might be better to have the money in something easier to turn into cash.

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1

Depends on the house. If it's a house that's <10 years old, you're looking at pretty minor repair work. You can probably afford to be aggressive.

I bought a home built in 1927 in 2006. Since then, I've put on a roof, replaced windows, replaced hot water tanks, replaced bathroom fixtures and corrected plumbing horrors. Total cost: $20k. Had I spent down savings on a down payment, I would have been in rough shape financially.

Other things to think about are:

  • How much bigger is the new house compared to your old place? If it's alot bigger, you may need furniture.
  • How long has it been since your town/county/city has done a tax assessment? If it's been a long time, surprise -- you may be getting a big tax increase. One of my coworkers moved into a city that last did a reassessment in 1970 -- not good.
  • Can you avoid PMI some other way? I found a local bank that doesn't sell loans to Fannie Mae, and doesn't require PMI for loans at 95% LTV.
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