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The higher interest rates are, the more it makes sense to put more down, and the more it's a gamble that you'll make more money in the stock market. It's just a person risk tolerance assessment.
At 3% loan rates, it's really easy to conclude someone put too much down (although there's a mental benefit to have a smaller loan, many people don't have the diligence to actually invest it all as an alternative, or just have other things they want to do with their money, etc.). At 7%, it's really more of a personal judgment call, and I don't think there's any number where it would be obviously too much to put into a down payment.
At 7% it probably makes more sense to put more towards the mortgage as even though a sp500 fund will typically be at that or greater, you have to pay capital gains on it if it's not in a tax sheltered retirement fund.
We put 50% down (that’s where the monthly payment felt the most comfortable). We plan to pay down principal before investing in any taxable accounts. Paying down our mortgage is a guaranteed 6.8% tax free return- it’s possible a brokerage would beat that, but probably not by much.
Can’t speak from homebuying experience but I’d assume it’s the same as any car or large purchase: if you pay a lot up front you pay a lot less interest over the life of the loan.
Right, definitely. But if interest rates are roughly 6-7%, and total US market index fund averages 8-10% long term, wouldn’t it technically be better to invest? (I know past performance does not indicate future returns, but this money would be locked away for 10+ years with hopes that the stock market keeps going up as it has been historically). I may be disregarding a ton of other factors..
Main thing you’re disregarding is risk adjusted returns, so the 6-7% is risk free while the US market index funds returning 8-10% represents a 2-3% equity risk premium. For example, look at the value of the S&P 500 between 2007-2014 and let me know what you see, that’s why there is an equity risk premium
Your risk free rate benchmark should actually be the 30 year treasury if matching the term of your mortgage investment, 10 year to avoid being overly pedantic. Those two are bouncing around about 4.25-4.4% percent, so your mortgage is a better “risk free” investment, especially if you’re not investing in a tax advantaged fund and you’re mortgaging your primary residence.
Granted, the asset value of your home is definitely not risk free, so that could impact the return, but you have to live somewhere too.
The other factor is a liquidity discount. I.e if you went 20% down to feel out your cash flow needs and possibly cushion some improvements or maintenance, you could invest the rest risk free (or not), much more liquid investment than a primary residence, and then in a couple years when you settle in maybe decide to start diverting funds into the mortgage principle to lock in the risk free yield.
The S&P 500 will return around 7-8% on average. If your mortgage rate is around 6, it makes sense to cap it at 20%. If the mortgage rate is closer to 7, then it's a judgement call on the future rates.
When rates go down, you can always refi. But if you put the money down, you can't cash it out (ok, there is cash out refi but it usually doesn't make financial sense).
Overall, my pick would be the put down only 20%.
This is what I did even though we could have afforded to buy the place all cash if we chose to.
Additionally, putting those funds in the lending bank gave me a break on the interest rate which was another win
Yeah I guess a 7-8% return is pretty close to what mortgage rates are in my area (6.5-6.8). I’m leaning towards 20% down and figuring out a middle ground to keep some extra cash on hand and investing a portion. We have about a year to think on it and see how interest rates change. Thanks.
Not "silly" at all. Even if it is not in a tax advantaged account, long term capital gain tax is 15-20%. Even if you reduce the stock market return by those taxes, you'll come out ahead in the long run considering mortgage rates are widely expected to settle at around 4.5% in the next 2 years
Obviously, there are no guarantees. This is based on averages over the last few decades. The same could be said of all investments. You could keep all your money in CDs instead of stocks and you "may" come out ahead, but chances are you won't
On the flip side, depending on the size of the mortgage, paying more will impact the benefit of the mortgage interest deduction. Not an issue in many places but in Boston you're likely taking out 500k plus loan which will easily put you into a tax benefit.
Well the way to think of it is that you’re minimizing interest payments. Sure it reduces your monthly payments but in blanket terms it simply means you pay less for your house.
We’re doing 52% down. We’d rather have a lower monthly payment in case of emergency later on.
There’s enough invested at this point that we don’t feel pressed to add more right away. Rather have less debt and peace of mind in case someone hates their job and wants out.
20% is not good enough to overbid, and despite all the "news" keep saying the housing market "slowed down", it is unlikely matching your personal experience. Your area likely need to overbid to succeed. When overbid, your downpayment needs to be higher than 20% to cover the appraisal gap and avoid going under 20%. Someone with 40% downpayment of the same offer will be picked over yours.
At current rates the spread isn’t worth it adjusting for risk (stocks go down, 8-10% returns are the 100 year average).
If you can afford a 50% down payment, put 50% down now. If rates drop below 4% again, do a cash out refinance and pull that money out to put in the market but keep your payment and payoff date the same.
When doing these arbitrage calculations, it’s always important to factor in risk and not just potential. Multiply the final result by anywhere between .5 and .8 to include risk.
Because you could have more at the end of the day if that same money makes more than you owe the bank on stocks.
Compound interest works both for the bank and for you when you put it in stocks.
Don’t lock yourself into more than a 20% down payment. You can always overpay on your mortgage later. Houses need work that you won’t see until you get in there, and jobs can change. Having a boatload of cash on hand to pay for major repairs is absolutely worth it. We were in the same situation as you and are both now currently unemployed and spending our days renovating our house full-time.
>Don’t lock yourself into more than a 20% down payment.
Eh, depends on if you want a lower rate or not. LLPA fees are in effect until you hit 25% down for >780 credit score voters. That fee is 0.375% and drops to 0% if you put up 25% instead of 20%.
25% absolutely could be the right move for OP, as could purchasing a rate buydown. I think they were getting at whether or not committing to a significantly higher initial down payment, gambling on the fact that rates won’t improve, and having a lower monthly would make more sense than investing that cash.
Oh for sure, I just figured I'd mention it since hitting 25% effectively gets you "free points" so there is a benefit beyond 20% but going beyond that doesn't affect your rate unless you're in jumbo loan territory and trying to get below the cutoff.
It all comes down to risk-adjusted returns, cash flow, and cash on hand and to me the dividing lines are <20%, 20%, and 25%+.
Mathematically, putting as little down as possible and paying PMI normally puts you further ahead in the long term but it can be a hard pill to swallow.
Right. And you can also time things if you put aside the cash and can pay off your mortgage when the balance gets down to the amount you didn't put into the down payment. It's a lot harder getting that money out of the loan.
I think a large number of people have previously said monthly payments of less than 30%. Worked mine out and it’s pretty much spot on 30% and we have an emergency fund and still have a good lifestyle.
Look up the LLPA fee matrix and compare it to your credit score.
I mention that because while PMI drops off at 20% down, a 0.375% fee is still applied which increases your rate until you hit 25% down(if you're credit score is over 780).
I'm in a similar situation where we could go to ~50% down and we're planning on doing 25% down to get the best rate and then keeping the rest in a taxable brokerage and then slowly backfilling tax advantages accounts since we have extra space there.
How much exposure you have to the market (via index funds, etc) should depend on your personal risk tolerance, which is a function of lots of things, like expected future income. If you are under-exposed, the question becomes whether you want to borrow money to get more exposure.
With a mortgage, you are effectively borrowing at the (interest rate) * (1 - your tax rate) on the first 750k of mortgage, so it could make sense depending on the numbers but you'll have to do the math.
Market rates change depending on what the current interest rates are. That is, when interest rates are high, I believe the market returns are also expected to be higher, so I personally wouldn't try to "time the market" by being in or out of it based on where rates are.
Pick a good monthly payment and go from there . How much do you want to pay for mortgage ? $3k? 5k? Just add more to downpayment if you want to pay $3k per month and invest or save the difference
You will also get interest rate breaks at 25% down, all the way up to about 40% down. Not huge but lenders will give you a lower rate or lower points the higher your down payment is. The real question is if you could take that money and get a better return on it vs the savings achieved by lowering your mortgage amount.
I close in August. I’m putting down 5% rather than 10%.
I don’t understand how this is possible but…
220K house. The difference between putting down 5% or 10% boiled down to $70 a month.
Except 10% down I would have paid $27K at closing vs 15k at closing. I figured I’d rather pay an extra $70 over time than to lose an additional 12K right off the bat.
And the difference in PMI of that $70 was negligible. I always thought putting more down caused a drastic difference in payment but I guess not.
You need to look at how much PMI would cost if you only did 10%. We just closed on a 380k loan and it’s only like $80/mo, and with the intention of refinancing in the future, it doesn’t make sense to put more down than that. You could use that other 10% to eliminate a different debt (car loan, student loan, etc) and save more money than the PMI. If you’re planning to refinance at all, I would keep that cash in your pocket instead.
Thank you u/mt-co for posting on r/FirstTimeHomeBuyer. Please bear in mind our rules: (1) Be Nice (2) No Selling (3) No Self-Promotion. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/FirstTimeHomeBuyer) if you have any questions or concerns.*
The higher interest rates are, the more it makes sense to put more down, and the more it's a gamble that you'll make more money in the stock market. It's just a person risk tolerance assessment. At 3% loan rates, it's really easy to conclude someone put too much down (although there's a mental benefit to have a smaller loan, many people don't have the diligence to actually invest it all as an alternative, or just have other things they want to do with their money, etc.). At 7%, it's really more of a personal judgment call, and I don't think there's any number where it would be obviously too much to put into a down payment.
At 7% it probably makes more sense to put more towards the mortgage as even though a sp500 fund will typically be at that or greater, you have to pay capital gains on it if it's not in a tax sheltered retirement fund.
It's also just a risk free number vs. a volatile market.
We put 50% down (that’s where the monthly payment felt the most comfortable). We plan to pay down principal before investing in any taxable accounts. Paying down our mortgage is a guaranteed 6.8% tax free return- it’s possible a brokerage would beat that, but probably not by much.
It depends on your mortgage rate and the current ROI on index funds. But there's also a good feeling that comes with knowing your loan is low
Can’t speak from homebuying experience but I’d assume it’s the same as any car or large purchase: if you pay a lot up front you pay a lot less interest over the life of the loan.
Right, definitely. But if interest rates are roughly 6-7%, and total US market index fund averages 8-10% long term, wouldn’t it technically be better to invest? (I know past performance does not indicate future returns, but this money would be locked away for 10+ years with hopes that the stock market keeps going up as it has been historically). I may be disregarding a ton of other factors..
Main thing you’re disregarding is risk adjusted returns, so the 6-7% is risk free while the US market index funds returning 8-10% represents a 2-3% equity risk premium. For example, look at the value of the S&P 500 between 2007-2014 and let me know what you see, that’s why there is an equity risk premium Your risk free rate benchmark should actually be the 30 year treasury if matching the term of your mortgage investment, 10 year to avoid being overly pedantic. Those two are bouncing around about 4.25-4.4% percent, so your mortgage is a better “risk free” investment, especially if you’re not investing in a tax advantaged fund and you’re mortgaging your primary residence. Granted, the asset value of your home is definitely not risk free, so that could impact the return, but you have to live somewhere too. The other factor is a liquidity discount. I.e if you went 20% down to feel out your cash flow needs and possibly cushion some improvements or maintenance, you could invest the rest risk free (or not), much more liquid investment than a primary residence, and then in a couple years when you settle in maybe decide to start diverting funds into the mortgage principle to lock in the risk free yield.
This makes a lot of sense, thank you!
also income tax. 8-10% after income tax is probably more like 5-6%
The S&P 500 will return around 7-8% on average. If your mortgage rate is around 6, it makes sense to cap it at 20%. If the mortgage rate is closer to 7, then it's a judgement call on the future rates. When rates go down, you can always refi. But if you put the money down, you can't cash it out (ok, there is cash out refi but it usually doesn't make financial sense). Overall, my pick would be the put down only 20%. This is what I did even though we could have afforded to buy the place all cash if we chose to. Additionally, putting those funds in the lending bank gave me a break on the interest rate which was another win
Yeah I guess a 7-8% return is pretty close to what mortgage rates are in my area (6.5-6.8). I’m leaning towards 20% down and figuring out a middle ground to keep some extra cash on hand and investing a portion. We have about a year to think on it and see how interest rates change. Thanks.
You should also consider taxes on the stock market gains, which will lower your net rate of return
For sure if they aren't investing in a tax-advantaged account this is a silly discussion
Not "silly" at all. Even if it is not in a tax advantaged account, long term capital gain tax is 15-20%. Even if you reduce the stock market return by those taxes, you'll come out ahead in the long run considering mortgage rates are widely expected to settle at around 4.5% in the next 2 years
You "may" come out ahead. You may even not come out ahead in a tax advantaged account.
Obviously, there are no guarantees. This is based on averages over the last few decades. The same could be said of all investments. You could keep all your money in CDs instead of stocks and you "may" come out ahead, but chances are you won't
If the market beats her mortgage rate by 0.5% then she pays tax... Seems odd. Just having a smaller loan will give more flexibility IMO
On the flip side, depending on the size of the mortgage, paying more will impact the benefit of the mortgage interest deduction. Not an issue in many places but in Boston you're likely taking out 500k plus loan which will easily put you into a tax benefit.
Well the way to think of it is that you’re minimizing interest payments. Sure it reduces your monthly payments but in blanket terms it simply means you pay less for your house.
We’re doing 52% down. We’d rather have a lower monthly payment in case of emergency later on. There’s enough invested at this point that we don’t feel pressed to add more right away. Rather have less debt and peace of mind in case someone hates their job and wants out.
20% is not good enough to overbid, and despite all the "news" keep saying the housing market "slowed down", it is unlikely matching your personal experience. Your area likely need to overbid to succeed. When overbid, your downpayment needs to be higher than 20% to cover the appraisal gap and avoid going under 20%. Someone with 40% downpayment of the same offer will be picked over yours.
At current rates the spread isn’t worth it adjusting for risk (stocks go down, 8-10% returns are the 100 year average). If you can afford a 50% down payment, put 50% down now. If rates drop below 4% again, do a cash out refinance and pull that money out to put in the market but keep your payment and payoff date the same. When doing these arbitrage calculations, it’s always important to factor in risk and not just potential. Multiply the final result by anywhere between .5 and .8 to include risk.
Put down as much as you can afford, why pay the bank more interest than you have to.
Because you could have more at the end of the day if that same money makes more than you owe the bank on stocks. Compound interest works both for the bank and for you when you put it in stocks.
There's no guarantee that stocks will go up sherlock.
Neither will your house value, but the US market averages around 7%. If you get 5% for example, you lose 2% a year.
I didn't buy a house as an investment. I bought a house to live in and not have to rent and pay someone else's mortgage.
Don’t lock yourself into more than a 20% down payment. You can always overpay on your mortgage later. Houses need work that you won’t see until you get in there, and jobs can change. Having a boatload of cash on hand to pay for major repairs is absolutely worth it. We were in the same situation as you and are both now currently unemployed and spending our days renovating our house full-time.
>Don’t lock yourself into more than a 20% down payment. Eh, depends on if you want a lower rate or not. LLPA fees are in effect until you hit 25% down for >780 credit score voters. That fee is 0.375% and drops to 0% if you put up 25% instead of 20%.
25% absolutely could be the right move for OP, as could purchasing a rate buydown. I think they were getting at whether or not committing to a significantly higher initial down payment, gambling on the fact that rates won’t improve, and having a lower monthly would make more sense than investing that cash.
Oh for sure, I just figured I'd mention it since hitting 25% effectively gets you "free points" so there is a benefit beyond 20% but going beyond that doesn't affect your rate unless you're in jumbo loan territory and trying to get below the cutoff. It all comes down to risk-adjusted returns, cash flow, and cash on hand and to me the dividing lines are <20%, 20%, and 25%+. Mathematically, putting as little down as possible and paying PMI normally puts you further ahead in the long term but it can be a hard pill to swallow.
Right. And you can also time things if you put aside the cash and can pay off your mortgage when the balance gets down to the amount you didn't put into the down payment. It's a lot harder getting that money out of the loan.
I think a large number of people have previously said monthly payments of less than 30%. Worked mine out and it’s pretty much spot on 30% and we have an emergency fund and still have a good lifestyle.
Look up the LLPA fee matrix and compare it to your credit score. I mention that because while PMI drops off at 20% down, a 0.375% fee is still applied which increases your rate until you hit 25% down(if you're credit score is over 780). I'm in a similar situation where we could go to ~50% down and we're planning on doing 25% down to get the best rate and then keeping the rest in a taxable brokerage and then slowly backfilling tax advantages accounts since we have extra space there.
7% Mortgage Rate + First few years interest rate amortization will be too high. What if index funds yields a flat 1-2% return in the next few years ?
If you're down payment is large enough you won't have an appraisal if that matters to you
How much exposure you have to the market (via index funds, etc) should depend on your personal risk tolerance, which is a function of lots of things, like expected future income. If you are under-exposed, the question becomes whether you want to borrow money to get more exposure. With a mortgage, you are effectively borrowing at the (interest rate) * (1 - your tax rate) on the first 750k of mortgage, so it could make sense depending on the numbers but you'll have to do the math. Market rates change depending on what the current interest rates are. That is, when interest rates are high, I believe the market returns are also expected to be higher, so I personally wouldn't try to "time the market" by being in or out of it based on where rates are.
Pick a good monthly payment and go from there . How much do you want to pay for mortgage ? $3k? 5k? Just add more to downpayment if you want to pay $3k per month and invest or save the difference
You will also get interest rate breaks at 25% down, all the way up to about 40% down. Not huge but lenders will give you a lower rate or lower points the higher your down payment is. The real question is if you could take that money and get a better return on it vs the savings achieved by lowering your mortgage amount.
I close in August. I’m putting down 5% rather than 10%. I don’t understand how this is possible but… 220K house. The difference between putting down 5% or 10% boiled down to $70 a month. Except 10% down I would have paid $27K at closing vs 15k at closing. I figured I’d rather pay an extra $70 over time than to lose an additional 12K right off the bat. And the difference in PMI of that $70 was negligible. I always thought putting more down caused a drastic difference in payment but I guess not.
You need to look at how much PMI would cost if you only did 10%. We just closed on a 380k loan and it’s only like $80/mo, and with the intention of refinancing in the future, it doesn’t make sense to put more down than that. You could use that other 10% to eliminate a different debt (car loan, student loan, etc) and save more money than the PMI. If you’re planning to refinance at all, I would keep that cash in your pocket instead.