Percent down on home purchase

[agammaglobulin]

I know, generally, it's best to put at least 20% down on property, but do you get much benefit from putting more down (30 or 40%)? Or would it be better to do 20% down with the rest invested at higher rate of return than the mortgage in index funds? Also, any advice on 15yr vs 30 yr mortgage?

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[deleted480308]

I tend to default to wanting to own things outright and not owing anything to anyone....

 

[Plastikos]

This is somewhat a personal decision, and ideas and feelings differ. Mathematically, you have to include the PMI as part of the investing opportunity costs.

At these low interest rates and thus also low tax benefit, a reasonable argument could be made for investing rather than putting it all into a down payment. You have to weigh that against all other typical home ownership/equity concerns. You also have to look at your investment choices that you would be doing instead of a down payment and their likelihood of a better return going forward.

Some people are so uncomfortable with debt that even tax advantaged, inflation hedged, and dischargeable debt is even too much for them, and theres nothing wrong with that. Others, like yourself may see the low cost of it and decide to put it to work elsewhere. As long you fully understand the risks and opportunity costs there is nothing with either way.

Given what some say the market has to offer over the next decade or so, this is a tough one to point to one being "better".

 

[Information Underload]

A home is a very illiquid thing and can be hard to unload. If you tie up a bunch of money in it, you're not going to have access to that money outside of another loan. You're also getting a pretty sizeable tax break based on your interest payments, so when you compare the financials of a larger downpayment v. investing, keep in mind you can roughly subtract roughly 25-35% off of your interest rate as a physician. It's one of the few tax breaks that actually helps physicians as compared to the general populace. I'd much rather pay down my student loans that put money on a house, for instance.

As for a 15 v. a 30-year loan, the 15 obviously has the lower interest rate but is also less flexible. You can pay off a 30-year loan in 15. You can't pay off a 15-year in 30 outside of a refi (and if rates go up?). If you have a married couple where the Mrs. and Mr. are working, what happens if one decides to stay home and raise the kids? Having a 30-year mortgage is more convenient, for sure, in that situation, unless you only buy enough home where a 15-year mortgage is doable on the salary of the lowest earning spouse.

As a rule, I don't know if I'd put much more than 20% down on a house unless you just have a lot of extra money sitting in a bank doing a whole bunch of nothing.

 

[QofQuimica]

I would argue that you have to make a decision like this in the context of your overall investment/cash flow strategy. If you have yet to come up with a financial plan, that's where you need to start.

Putting down more money can make sense in many situations, such as not liking to be in debt. Or living in a state that protects one's home against creditors/lawsuits but doesn't protect other investments like bank accounts and taxable accounts. Or being a person whose road to hell is paved with good intentions to save but who won't actually save much money unless forced to.

As for the supposed tax break, well, paying zero interest handily beats getting a 33% deduction on whatever interest you pay. So I wouldn't make the decision to take on a mortgage for the purpose of getting a tax deduction for it. Though of course if you're going to take the loan anyway, you should certainly take advantage of the deduction.

As for number of years, again, opinions differ. Some people argue for extending such relatively cheap loans for as long as possible. Others argue with taking the shortest loan so that you pay less interest (including, typically, getting a lower interest rate). Again, you need to think about this in light of your larger financial picture. For example, if you want to be able to retire in 10 years, a 30 year mortgage is probably not the best move.

 

[W19]

20% down just to avoid PMI... You don't want to tie up all your cash in a home. If your income can get you a 15-year mortgage, you should look into that... I know most people would say get a 30-year and try to pay it off in 15, but the reality is that most who do that won't.

 

[The White Coat Investor]

You generally won't get a better rate or terms. Obviously your payments will be lower if you're making payments on a smaller amount.