Let’s say I’m gonna buy a 600k house and can put down up to 350k.
Current available interest rate 30 yr is 5.875%.
I could put minimal down (preferably at least 20%, no pmi) or as stated up to 350k. The obvious argument against putting a lot down is “you can invest it and make more money”
Ok so invest it at high risk for a few years and maybe get 8% return? Then you have to pay tax on that so it effectively is 6% return? Seems like putting down as much as possible is a good decision. I’m open to suggestions.
Posted by RockyDisaster
13 Comments
It’s called having good cash flow. If you like to be house rich, go for it.
Put down 20%, keep the rest in high yield savings or t bills (low risk). Make extra payments to your mortgage to pay it off faster (even 1 extra payment a year saves like 5 years and a ton of interest ). The upside is the flexibility and security you get by knowing you have that liquid money saved up. If you put in all in the house you may be scrambling if you get hit with large expense.
S&P 500 past 3 years has returned 24%, 23%, 16%.
You can withdraw 48,350 (96,700 if married) of profit each year tax-free as long as you have hold the stock for more than a year.
If you pay 5.875% on 600k, that is 35k in interest, and roughly 6k in property tax. This is 41k in tax deductions. 5.875% on 250k is only 15k in interest + 6k in prop tax.
That means there are 20k additional deductions, which is worth a ~5k refund (assuming you are single). When you factor this refund into your interest paid, it lowers the effective rate to 5%.
If you want returns, ETFs. If you want a home, buy property
After calculating the amount of interest I was being charged for the life of the mortgage I decided to pay cash instead of playing the stock market.
With your example for a $250k loan you end up paying over $532,000.
Consider this first: In your community or city, what are the comparables for advancing home prices over the past ten years? For instance, in a GOOD neighborhood, a home value could double every ten years (7%) for a single-family detached house. Condos less. Figure it out.
Also, you might consider the condition of the home when determining your down payment. Perhaps it needs $100K before you move in to fix or upgrade a kitchen, baths, etc. Think about the long-term home investment and what you’ll have in a decade.
I would find me a house for $350k and buy it.
The reason you put 20% down and not 58%, is because of the time value of money. The present value of 230k is worth more if you don’t put it in the down payment .
Example :
The future value of 230,000 invested in an 70/30 portfolio with an 8% discount rate is $2,310,000 at the end of an30 yr mortgage term.
(70/30’has historically returned 8-8.5%)
The future value of 230,000 extra downpayment is about $261,000 at your interest rate, at the end of the term.
If you put a 20% down payment on the house and invest the rest in a 70/30 portfolio, you will have over 2 million more dollars when your mortgage is over.
Also if you have to liquidate securities at a gain to make a 350k payment, it makes that much more sense to make 20%, because additional tax in today’s dollars , amplifies the gap in benefit.
Hear me out. Put 5% down or whatever is the lowest you can get a loan with. Your interest rate will be lower. Then recast with the rest. Lower your mortgage payment.
Interest rates are lower with a lower down payment. This only works if you are not in low inventory area though as your offer will get overlooked for something with higher down payment
Having more cash in hand or investments that can be liquidated quickly is always better than borrowing against your home later. Id personally keep the cash as investment. Also is that the lowest rate you can get truly? I would buy max points to get that reduced since you have the cash.
It really depends on what your comfortable levels given your stage of life. Partner and I recently did the math on whether to finance our 7 figure renovation or not. Yes, we’d make more money keeping the cash invested but ultimately, we realized that we would be trading more of our time to bring in income suffice to cover the extra expense of the mortgage.
We decided that at our age (mid 40’s) with our current financial position/obligations, while leaving the money invested would earn us more money in the long run, we’d either have to work longer at our 3/4 time careers or increase to full-time.
We’re no longer interested in trading our time for stuff so we took the path of paying cash for the renovation and going on with our day.
I would put 20% down and invest the rest.
$230k at 8% is ~$18.5k in capital gains. The first $48k of long term capital gains each year has zero federal tax. There are also tax savings with retirement accounts. Even with dividends the effective tax rate is relatively low.
Really it comes down to what you expect to make investing, your risk tolerance. The S&P 500 is up ~10% a year over the last several decades, up 16% last year. But in 2022 it was down ~19%. But past performance is not indicative of future results. Paying extra towards the down payment, extra towards the mortgage each month is a guaranteed 5.875% return.
The chances of stock market to continue giving double digit returns are diminishing YoY in USA (unless surprises like AI boom etc. materialise) – take the ownership of physical property instead of enriching the billionaires with your money