This is all theoretical as I’m 20m still living with my parents but trying to understand what will be better to set my self up financially for the future.
Let’s say I have $60k in investments and looking to buy a $300k house. That is enough for 20% down which will eliminate PMI. My question is, would it be better to liquidate the investments and put all of that money down on a house, lowering the monthly payment so I have more to invest every month. Or put little money down, have PMI, and a larger house payment but have $60k in investments?
20% down : Monthly payment would come out to around $1,937.
Principal & Interest: $1,439
Mortgage Loan Type: 30-Year fixed
Interest Rate: 6.0%
Property Tax: $242
Home Insurance $256
Investments able to make each month: $555 but have $0 currently in investments.
3% down : Monthly payment would come out to around $2,492.
Principal & Interest: $1,745
Mortgage Loan Type: 30-Year fixed
Interest Rate: 6.0%
Property Tax: $242
Home Insurance: $246
PMI: $250
Investments able to make each month: $0 but have $60k in investments that continue to grow.
Better to liquidate investments to lower house payment or keep investments but have a higher house payment?
byu/jasgofas inpersonalfinance
Posted by jasgofas
5 Comments
Your best bet by far is to continue to live with your parents, save, & invest.
Given that you buy the house, i think liquidating could make sense if you have a stable job. Especially if the interest rate also changes. You’re operating at risk for awhile & your expenses will be much higher.
debt or invest: https://www.bogleheads.org/wiki/Paying_down_loans_versus_investing https://reddit.com/r/personalfinance/comments/16jcmnh/_/k0qox0x/?context=1 https://reddit.com/r/personalfinance/comments/zssug0/_/j1ddljd/?context=1
Pmi cost: https://old.reddit.com/r/personalfinance/comments/mznp3v/_/gw1mj4g
You didn’t ask these questions, but here are a few other points to consider …
1. Discuss with your parents if they are willing and able to be “the bank” for any future loan. You can get a rate below commercial market, currently under 4% based on IRS Applicable Federal Rates. My parents did this for us, and we’re doing it for our kids. Why pay interest to a bank when you can pay it to your parents. You still get the income tax write off for interest.
2. If you can do #1, you may be able to get away with a 20 year mortgage rather than a 30 year. The payment on a $240K mortgage over 20 years @ 4% is $1454, just slightly more than the 30 year mortgage at 6%.
3. I hate debt, so a 30-year mortgage with only 3% down, your second scenario, would be $897K over the life of the mortgage almost 3X the value of the house itself.
4. Putting less down makes you more susceptible to market value swings, i.e. you’re more likely to be underwater if the housing market drops, which does happen.
It depends on the rates and your assumptions on investment returns, but generally, the down payment route and eliminating PMI is better.
That provides two guaranteed aspects of savings. One, not paying PMI, and two, not paying as much interest.
Investment returns are not guaranteed. Sure, maybe your investments go up 20% and beat your mortgage interest and PMI savings. Or maybe they lose 10%, leaving you with less than you started.
When you factor risk, the double guarantee wins.
PMI is typically high enough that it makes sense to put 20% down, but no more (until you are >50 years old or so).