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Should You Put Money Down On a Home Purchase
Written For: Financial Sense Series on PlattsburghMortgage.com
The first question I ask is, what else could you do with the money? Compare those results with the savings you anticipate by putting money down. So should you put a down payment on a house? If you are spending $15,000 to save $150 could you make more than $150 a month by placing that money somewhere else? The answer to this is not always obvious but hopefully this article helps you think about the topic in a more exploratory way.
My Experiences Helping Clients Decide How Much Money to Put Down
Should i put a down payment on a house? Do the savings outweigh the benefits of putting your money to work elsewhere?
I once had a borrower come in for a consultation with the idea that he would withdraw $40,000 from his retirement to put more money down and eliminate monthly mortgage insurance. Mortgage insurance is a payment that is required if you finance more than 80% of the sales price, in most Conventional loans. (FHA and USDA loans also have monthly insurance fees called guarantee fees and the mortgage insurance premium). Should I put a down payment on a house?, he asked. I was intrigued by the idea so thought I would explore it with him.
How much is the tax penalty for early withdrawal, I asked. “15%”. And how much much is that? “$6,000”. So in reality it is more like $46,000? “Yes”. Okay… Now let’s assume you plan to keep your home for 10 years. How much money could you make if you kept the $40,000 in investments. Think conservatively. Maybe you would see 5% a year? If that is a fair assumption, your $40,000 would grow to $65,000 in 10 years with no additional investments. Now let’s see how much money you would save by putting that money down. First the mortgage insurance, $70 a month. Then the reduced mortgage payment, $194 a month. So over ten years that is a total savings of $8594. Does it make sense to spend $65,000 to save $8594? Granted you have $40,000 down in equity so let’s call it $48,594. Is it a good idea to spend $65,000 to save $48,594? I think it becomes clear rather quickly that a down payment is not always a good idea. In some cases interest rates can be higher and it might make sense to put down a large down payment. It is a rare circumstance but it is possible. In most examples I have discussed with clients, unless the interest rate is 6% or higher, or they are simply irresponsible with money, it makes more sens to keep the money invested or in savings.
Real Estate Can Help You Build Wealth With or Without a Down Payment
Most banks want a large down payment because it offsets the risk but should you put a down payment on a house? A bank is in a less risky position when you have a large down payment. You should keep this in mind when having this discussion with your mortgage professional. Yes, you will likely need to put money down to show you are a serious buyer, but don’t get caught up in the Dave Ramsey philosophy of having no debt. Try to find a wealthy business person without debt. It is challenging. According to valuepenguin.com, The average loan extended to U.S. businesses in 2018 was $663,000. Without operating capital ( money to invest) would any of those business be as successful as they are today. My simple rule is this; if you can make money borrow and if it is a depreciating asset (car) pay cash. Leases might be the exception to the rule these days.
Real estate is a great way to build wealth. Real estate increases in value every year and can build wealth for you. According to Zillow, the average home increases in value between 3 and 5 percent every year. Don’t give up all your working capital to get started in real estate without having a conversation with a finance professional that can offer alternative views of your financial situation. Next time you ask, Should I put money down on a house, first ask yourself if that money could make you more money elsewhere.
Read More: No Money Down Home Loans