Down payment of 15% vs. 20% - pros and cons

Question

We are buying a home in CA and we would like to know if there is either any financial benefit or disadvantage to a 15% down payment compared to a 20% down payment in our situation.

We are pre-approved for a 30 year fixed VA mortgage. We could put 20% down, which would get the mortgage payment (including taxes and insurance) down to an amount we can afford each month. Or we could put 15% down, put the remaining 5% in savings, and draw a little off of that each month to help make the mortgage payment.

PMI insurance is not a factor because with a VA loan we will not be required to have it even if we put less than 20% down. We will most likely sell the house in three to five years. Closing costs and agent fees will not be a factor when we sell the house because that will be covered by a relocation package.

Answer 1

Go for the 20%.

Paying off debts as soon as possible, is almost always going to be the better investment of all.

In this case the choices you presented are either putting 5% of the total amount in a savings account(that will yield 1%,perhaps less according to this ) or getting that 5% not cost you 4% in interest added on top of the rest the mortgage.

Now, since you plan to stay there just 3 to 5 years, you really should consider if rent is a better option (cost wise as well since houses have state taxes and not only) or a safer option.(what happens if in 3 to 5 years we re in a down market and you NEED to sell that house to get your next one?)

Ps. If you need to get a 30 years mortgage with an as big as possible down payment to be able to afford the monthly payment, buying a house may not be the most financially sound option for you to begin with.

Ps2. You can get more detailed insight on the goings of buying/selling/renting houses on this excellent FI advocate right here.

Answer 2

To a point, this is very situational, and without knowing your whole financial situation and personal preferences, it's difficult to be objective.

Benefits of putting 20% down:

• Cheaper monthly payments
• "Pride" of owning more of the house, and that you are less in debt
• In the event that you continue to own the house long term (I know you plan on moving in 3-5 years), your total interest exposure is lower since you have borrowed less money
• Not applicable for your VA mortgage, but for some, they would be subject to private mortgage insurance until they own 22.8% of the house rather than the 20% if they put it down initially
• No risk of "accidentally" spending that 5% on something else

Benefits of putting 15% down:

• You don't want to completely deplete your funds to buy a house. Repairs can be expensive and little things add up. From your comments, putting 15% down would make the monthly payments not affordable for you which is a precarious situation to be in

• Likely (hopefully) your APR is less than 7%, so you could invest that 5%, and in theory it would outpace the difference in the interest you would be paying

• You may have other expenses that arise, potentially in the 3-5 year period during which you move that you need the money for, mortgages are often the cheapest (rate) loans you can find, so if you deplete your savings and have to take on a personal loan, the rate will likely be higher

For what it's worth, I put 15% down on my house.

Answer 3

rent, don't buy. The chances of the housing market being lower in 3-5 years is 50/50. There is a non-zero risk of the housing market dropping 10%, wiping out half the equity in a 20% down payment.

Look at the housing market cycles over the last 50 years. We are currently nearing a top. What comes 3-5 years after a top? A fall. California is especially prone to large fluctuations in market value.