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Should You Put Money Down On a Home Purchase

Written For: Financial Sense Series on PlattsburghMortgage.com

 

Should i put Money Down on a house
Buying a home is a big decision in your life and you want to make sure you do it right. Deciding how much money to put down on a house is a big part of that decision. There are benefits in putting money down but there are negatives also. Really, it is about understanding money and how to make money work for you. 

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.

Continued Below

Average US Home Prices
Average Home Prices in The United States

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

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Plattsburgh Mortgage Team

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Summary
Should You Put a Down Payment on a House?
Article Name
Should You Put a Down Payment on a House?
Description
Are you buying a house and deciding how much to put down? Sometimes, less money down is better! Learn the things to look for and find our what down payment option makes the most financial sense for you.
Publisher Name
Bank of England Mortgage
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