How much to put down if you have the money

M

MalibuRenter_IHB

New member
In my seemingly endless analysis and proformas of the housing market, I am looking at the issue of how much of a downpayment to make, assuming someone has much more than 20% down saved (for example the Troughers from an analysis post earlier this week).



I'd like any input on personal experiences, or factors I might be missing. It sounds to me like the following factors could push you toward higher downpayments (if they are applicable to you when you go to buy):

1. Very low income tax rates.

2. Not itemizing, or being at such a high income that itemized deductions aren't fully counted.

3. High mortgage rates, especially if they are higher than the aftertax return on other investments.

4. Qualifying for a lower interest rate loan (e.g., a program which requires 25% down. Yes, I expect to see those.)

5. A gain from a prior real estate transaction which needs to be rolled over.

6. Large downpayment required to bring debt to income or debt service to income ratios in line.



Factors which could push you to only put 20% down, even though you have a lot more in savings:

A. Higher expected aftertax return on investments than mortgages.

B. Need for liquidity or concern about job loss.

C. Expecting to do significant repairs or upgrades to property.

D. Increasing household costs, e.g., having kids.

E. High cost of turning savings into cash, such as illiquid investments (e.g., other real estate), or retirement accounts.



Am I missing anything? Appreciate your help.
 
A maximum of $1.1 mil may be claimed as mortgage interest deduction, and usually the amount that may be deducted is less.




Per the latest "housing relief" bill passed by Congress, home owners with no mortgage will be able to claim an added deduction for their property taxes, above what is paid. Or is it a credit? Doggone, now I have to go look it up.
 
<em>home owners with no mortgage will be able to claim an added deduction for their property taxes, above what is paid</em>



Now that's the first bit of info in this bill that I like ! Encourage paying off the mortgage debt and rewarding those that do when they lose the interest deduction. I like it.
 
I will look into this more, but so far:


If you own a home and do not itemize, you will be able to add $500 to your standard deduction, $1000 if MFJ. What is unclear to me is whether you have to own your home outright or you just have to be using the standard deduction? Anyone? Bueller?






Added:


from the House Committee on Financial Services:




<em>Provides taxpayers that claim the standard deduction with up to an additional $500 ($1,000 for a joint return) standard deduction for property taxes in 2008.</em>






What I get from this is that if you are using the standard deduction, (as opposed to itemizing), and you pay property taxes on your personal residence, you will be able to deduct $500/$1000 for property taxes in addition to your standard deduction.
 
[quote author="MalibuRenter" date=1218852602]



Factors which could push you to only put 20% down, even though you have a lot more in savings:

A. Higher expected aftertax return on investments than mortgages.

B. Need for liquidity or concern about job loss.

C. Expecting to do significant repairs or upgrades to property.

D. Increasing household costs, e.g., having kids.



Am I missing anything? Appreciate your help.</blockquote>


That's a pretty thorough list. I'll probably be in a situation where all A-D apply, and am therefore considering putting even less than 20% down if I am not forced to. We'll see how the FHA and mortgage insurers stand a year from now.
 
Thanks awgee. Good info.



"$1000 if Married Filing Jointly" - <a href="http://www.irvinehousingblog.com/forums/viewthread/2245/">California courts finally get it right</a>
 
Malibu,



One big reason for putting 20% or more down is to avoid paying PMI. Some people I speak with say paying PMI is just a complete waste of $ if you have the cash to put down since it is an expense added to your mortgage that doesn't decrease your principle. This is the reason I pay my auto insurance premium in advance. For example, AAA charges a crazy 17% interest on your insurance principle if you don't pay in advance.



Perhaps PMI will fall under #3. If your alternative investment were to have a higher rate of return with PMI and taxes taken into consideration then you would be willing to pay the PMI. Since I'm not a savvy investor I'll be putting 20% down.
 
If you think you can match or beat the S&P;index, then you should put less than 20% down. Take that extra money and invest it in other areas. Actually the main key here is to diversify your money. If 20% down puts you into a situation where your house is your life-blood, then I wouldn't do it.
 
PMI can be deducted.



In terms of the amount, why tie up so much cash? It's all about opportunity cost. You can invest that money elsewhere, even buying a tax free muni bond and get an after tax yield of 6.5%.
 
i'm not sure i understand here:



pay 7% interest (estimate), plus 0.5% PMI tax deductible, so 7.5% "pre-tax dollars", in order to buy munis that pay 6.5% "tax-free dollars"



i agree that gives you flexibility, etc, but aren't you still losing 1%? or am i missing something?



thanks
 
Good thread MR - wife and I have been debating this same thing for months now.



Here is a twist to your question: what if your downpayment fund gets to the point that it covers the entire purchase price of the house? What would you guys do? Still pay only 20% and invest the rest elsewhere? And to Freedom's point, where exactly would you invest where you can gaurantee better return that the interest on the mortgage?



Some other reasons why might want to put 20% or less:

1) you want to have the walk away option and not tie all your savings into 1 asset (basically risk sharing with the bank)

2) you are betting that inflation will be much higher and the monthly nut becomes a non-issue quickly as the dollar sinks (i guess the opposite is true as well...if you believe in deflation, you should put more down)
 
<blockquote>... what if your downpayment fund gets to the point that it covers the entire purchase price of the house? What would you guys do? Still pay only 20% and invest the rest elsewhere?</blockquote>
I asked this question awhile ago. Here's the discussion:



<a href="http://www.irvinehousingblog.com/forums/viewthread/348/">Mortgage vs. Cash</a>
 
[quote author="freedomCM" date=1218937282]i'm not sure i understand here:



pay 7% interest (estimate), plus 0.5% PMI tax deductible, so 7.5% "pre-tax dollars", in order to buy munis that pay 6.5% "tax-free dollars"



i agree that gives you flexibility, etc, but aren't you still losing 1%? or am i missing something?



thanks</blockquote>


Personally, I would put 20% (or whatever it took to avoid PMI, get best mortgage rate, etc.) as I would want to max tax-deferred retirement savings such as 401k and 403b along with education savings for the kids. If your marginal tax load is 37% now, a 7% mortgage interest rate really costs you 4.4%. Considering the assumably lower tax load coming out on retirement savings when finally withdrawn, a target pre-tax return of 5.5% would be a B/E. Over the long haul, it shouldn't be that difficult to find a return of 5.5% pretax.
 
William Lyon Financials would only give 30-year fixed rate for at least 30% down. For 20% down, it has to be 5-1 arm, is this normal for other lenders?
 
[quote author="WestparkRenter" date=1219644867]William Lyon Financials would only give 30-year fixed rate for at least 30% down. For 20% down, it has to be 5-1 arm, is this normal for other lenders?</blockquote>


No, I know you can get loans this year with 20% down for 30 years fixed. However this was with excellent credit. I recommend you shop around.
 
They give me the above quote based on excellent credit(FICO in the 800 range) and very high income, no debt, and no contigencies. Loan amount is in between $625K and $760K. I pulled out and did not purchase the house until things are normalized, credit wise. My motto is that if my family cannot afford the house then nobody can either.
 
[quote author="WestparkRenter" date=1219704176]They give me the above quote based on excellent credit(FICO in the 800 range) and very high income, no debt, and no contigencies. Loan amount is in between $625K and $760K. I pulled out and did not purchase the house until things are normalized, credit wise. My motto is that if my family cannot afford the house then nobody can either.</blockquote>


Good motto. The loans I was quoting were for comforming loans. I know the non-comforming market is in upheaval so I don't know what their guidelines are. Best of luck.
 
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