How much should you really put down?

irvinehomeowner

Well-known member
I've actually wanted to talk about this for quite a while and I guess since this is a new era, this will probably be a good time.

I know that from a lender/seller POV, the more down the better... less chance of foreclosure, skin in the game, higher chance of closing escrow etc etc.

But as a buyer, with interest rates so low, is it really the best move financially?

Considering how uncertain the market is and the fact that there may be little appreciation in the next 5-10 years and that most people don't stay in a home that long... wouldn't you want to minimize that cash out risk?

When I bought my first home in the early 90s, I had enough to put down 20% (homes were much cheaper then) but chose to put down only 5% because I didn't want to commit that much cash to my first home (which I knew would be transitional). I could easily afford the payments and knowing I still had money in the bank seemed to a safer bet for me (if you recall the early 90s was the last time the market bottomed). A few years later, I sold it and ended up with enough to put 20% on the next house that was double the price (yay RE cycles!).

But considering we are approaching (or maybe not even near) the bottom of this latest cycle, why would I want to commit 20%? In addition, 20% now is a lot more than it was back then and if my DTI can support say a 95% LTV home, why don't I just put down 5%?

I guess what I'm saying is if I can afford a $475k loan easily, wouldn't it be better to buy a $500k house and put $25k down instead of putting $100k down? It's not like I am actually going to pay all that interest since I will most likely move within 5-10 years.

(and yes, I know there is PMI and stuff but humor me here)
 
I agree with you. Why sink and anchor all your cash. For some people it is a mental thing though. My husband is of the opinion that a huge down payment is better to make the monthly mortgage amount lower. Whereas I would rather pay a higher mortgage amount monthly and have a huge reserve.

I guess that dynamic may change if you were like my mother and money burns a whole in her pocket. But if not......
 
Put down as much as you need to make the payment comfortable. Yes, you can argue that PMI is a dead weight payment - it's rarely tax deductible. Meeting what your payment tolerance is will give you plenty of well rested nights knowing that you can afford the home first, and that second: you have money in the bank just in case. Cash is king right now, and as you probably know already... "it's good to be king!".
 
I was hoping SGIP would post here.

That's the thing, with the credit crunch and liar loan scares, many lenders don't have low down programs anymore unless you go FHA. So even if you wanted to hold your cash, it's hard to find someone to approve you.

But... I guess what I'm wondering more is, if the payment is affordable, what would you guys do? Keep more of your down solvent or go ahead and put the 20% down?
 
Its not just the PMI, there is also increased upfront fees for less than 20% down, or a higher interest rate, no?

Personally, when I do eventually buy, I plan on 20% down, and a 15 yr mortgage, so that I can have a paid-off house to retire in.
 
The rate impact isn't much - perhaps .125 to .25% which in the grand scheme of things is zip.

Once cash goes into a home it is very, very difficult to extract it if you need it. HELOC's are gone and cash out refi's are limited to low loan to values.

When that emergency comes up - and it will - you have to crack open liquid investments (other than moonshine, but that all depending on the emergency...) and house equity is anything but liquid.

If you can put the cash down, great. If you want a cushion, great. There isn't a generalized wrong answer. It's a personal question that only an individual can analyze.
 
I guess I'm wondering why you would put all of the effort, time, thought, money into something you only plan to live in for 5-10 years? Doesn't anyone ever buy a "forever" house anymore. I guess I put down 50% because I have no intentions of ever moving and I'd like to have no mortgage payment by the time I'm 60. Forget it, I just realized how very boring I am.
 
Assuming I had enough money in the bank to keep some nest egg savings, I would probably put down more in order to lower my monthly payments over the long haul. I don't know if this is the financially smart thing to do, but it's what I would be comfortable with. I know if I borrowed more and had a huge mortgage payment to make every month, I'd worry about what would happen in the future if we had a job loss, etc. I'd rather put more down at the beginning and keep my payments more manageable down the road.
 
There are a lot of factors that should go into deciding how much you should put down purchasing a home. The fact that interest rates are so low right now, I'd be more inclined to put down less and lock in the low rate in for 30 years and let inflation eat away at the loan balance as time goes on. That being said, it is important to determine what the comfort zone is in terms of the monthly payment and determine what the tax benefits will be of having a higher interest deduction. It really a case-by-case situation that each buyer has to analyze before they make their decision.

One thing that I have learned through this economy downturn is that cash is king and it's always a good thing to have a nice safety net just in case.
 
Great answers from everyone.

I have just always been wary of putting so much money down into anything... and especially a depreciating asset (which is why I don't purchase new cars).

The thing that gets me here is you see all these people who either did 0% down or low down and got their money back via HELOCs or refis and then they walk away when they get upside down... basically getting a ding on their credit (which enough cash can alleviate since they either didn't put it down or extracted it). While those who did put the 20% down have lost it all and although they can also walk away, they will either get the same credit ding and have nothing or just straight out lose their down and be unable to buy another house.

And yes, this is a personal question but I appreciated the differing viewpoints.

As for myself, I would probably be more comfortable with doing a 10/10/80, I'm just not sure I want to commit 20% even if I have to take a hit in interest on the second. At most, I lose 10% and I still have a 10% cushion on top of whatever reserves just in case... and no PMI.
 
[quote author="irvinehomeowner"]Great answers from everyone.

I have just always been wary of putting so much money down into anything... and especially a depreciating asset (which is why I don't purchase new cars).

The thing that gets me here is you see all these people who either did 0% down or low down and got their money back via HELOCs or refis and then they walk away when they get upside down... basically getting a ding on their credit (which enough cash can alleviate since they either didn't put it down or extracted it). While those who did put the 20% down have lost it all and although they can also walk away, they will either get the same credit ding and have nothing or just straight out lose their down and be unable to buy another house.

And yes, this is a personal question but I appreciated the differing viewpoints.

As for myself, I would probably be more comfortable with doing a 10/10/80, I'm just not sure I want to commit 20% even if I have to take a hit in interest on the second. At most, I lose 10% and I still have a 10% cushion on top of whatever reserves just in case... and no PMI.[/quote]
It will be several years before those 80/10/10 loan programs come back. That being said, I'd definitely pick one of those over a 5% or 10% FHA loan.
 
I would buy the a house that afforded me the best of both worlds. One that I could afford to put 20% down and still have substantial emergency savings left over.
 
I would get a house where you can safely put down 20%, feel comfortable with the payments, and still have a cash cushion. If that means downsizing to something/somewhere cheaper, then do it. For me, I am still willing to wait and rent. Maybe the 2nd half of 2010 or 2011 will see some more cracks in the Irvine RE armor and opportunities to buy.
 
[quote author="mcdonna1980"]I would buy the a house that afforded me the best of both worlds. One that I could afford to put 20% down and still have substantial emergency savings left over.[/quote]
I would have to start looking outside of Irvine then... hehe.

I dunno... I used to think that but actually owning home(s) in this last cycle makes me a bit more RE shy. Before having kids, where else would I put my money, but now I have other responsibilities than just owning a greater percentage of my home.

And as another poster put it, sinking that much money into something that may not be your last house just seems risky.

And currently, for new homes, I just don't see much of a drop... even though prices are certainly more affordable in South County compared to Irvine, compared to median incomes... they are still too high.

I know that 20% has been the magic number for ages but just like the 6% broker commission... maybe that's something we need to re-examine. Isn't that also one of the reasons why people would rather rent than own?
 
IHO, one thing to remember is if people actually stuck to the 20% down and didn't take out that poop they called "loans" than this last cycle of real estate wouldn't of been so scary and therefore you wouldn't feel so nervous about it <!-- s:) -->:)<!-- s:) -->


I guess my point is, after going through what we have recently, the risk seems like it shouldn't be so hard to predict. I'm hoping the people in position to stop it will actually do it if we ever head that way again. But if not at least I have learned what to watch for.

I was too young to where I didn't even start looking at real estate until 2006 so I am not sure if I would have noticed this in the early/mid 2000's but I'm thinking I'll be able to notice it the next time it rolls around and my 20% won't feel so risky
 
My wife and I are asking ourselves the same thing.

We're in a situation where our income quadrupled in the last few months. We were saving previously, but only have enough for about 5-10% down in the Newport area. We could afford a 100% LTV loan easily on these homes (from a monthly payment perspective), but we want to be prudent with our money. We have a growing family, are older than an average first-time homebuyer, and would really like to settle down, but we can't decide whether to wait for the full 20% to be saved (another year or so) or just go for it.

My thought is that, due to our income, we could pay the loan down rather quickly if we really want to reduce the LTV.
 
[quote author="mcdonna1980"]I would buy the a house that afforded me the best of both worlds. One that I could afford to put 20% down and still have substantial emergency savings left over.[/quote]

You got an exalt from me on that one. I would do the same. If you can't afford 20% down and have reserves, don't buy a freakin' house.

But then I have a huge distaste for debt. It's nothing but a weight on my shoulders. I feel like you are never free as long as you owe someone a debt.
 
How much you can put down on the home depends on the area and competition. Right now, the market is hyper-competitive here and I was beaten on 11 bids by others, some with all cash offers. I "down-sized" from bidding on SFR's to condos and the one that I'm fighting over now has 12 offers. Basically, if you can offer all cash above asking, you'd win the bid. If not, it's a tough uphill battle.

My friend in Austin TX, on the other hand, just bought a brand new house for $130k with $10k down and borrowed the rest via USDA loan at 4.5% 30 year fixed rate, no PMI. Yup, you heard it -- USDA loan to repopulate rural areas (20 min outside of Austin). There was no bidding war and very little competition. I had no idea USDA offered home loans.
 
@25inIrvine: I agree... but there are some people who actually used the Liar/Ninja loans correctly and now don't have options if they were to buy in the future.

@strom: Your situation qualifies as one of those people who would have used those loans correctly. And when you can write-off the interest, financing more isn't actually that bad a prospect over putting more down... especially since all the interest is front-loaded anyways.
 
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