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 sense to keep the money invested or in savings.

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