Profile picture for kurisuw

Low mortgage rate vs. high downpayment: what to do?

 I'm in the happy position of having more than half the cash I need for a house on hand.  I'm also in the unhappy position of having a low salary that will leave breaking even most of my life.  Now I need to decide:

20% down, or 60% down (I have an emergency fund on the side that is not involved in this calculation).

60% saves me a ton on mortgage interest. 
20% down keeps cash on hand for investing.  However, after tax savings, I calculate (maybe wrongly, please correct if so) that I would need to beat 4% interest a year with those savings just to break even.  Now, since it compounds I could paint a rosy scenario where I do that easily.  But with the current markets, just as likely to tank and stay there as they are to rise again, it seems like keeping from paying 5% on mortgage as a sure thing is a good use of the cash.  Thoughts?
  • March 25 2009 - Berkeley
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Answers (2)

Profile picture for sunnyview
You might take look at the mortgage, savings and retirement calculators here. They are great running the numbers through different scenerios to get the best outcome for your situation. You might also want to look at Zilpy or Rentometer to see how close you can get to rent depending on the size of your down payment. I would be hesitant to put all 60% down into a house mainly because the cost of your mortgage (without taxes or insurance) will probably be less in terms of real cost over time. I would probably limit the down to maybe 30-35% of the available money if it were me. Run the numbers and see what makes sense fro your situation.
  • March 25 2009
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Profile picture for sunnyview
I think it depends on how old you are and how comfortable you feel with investing. I think that 60% down is high, but that you might benefit from having more than 20% down if your occupation has long term limited income. I think it also depends on the kind of personality you have. Will you feel like you are missing our on the market if you money if tied up or will you feel more comfortable having a bigger stake in your house? If it were me, I would want to have the housing be as close to self supporting as possible while preserving as much cash to invest as possible. So for example, if putting 35% down made your mortgage, taxes, insurance (PITI) equal to rent, I would do that so you had the extra 25% to invest fro the future and still have extra breathing room every month. I know some folks like to put down the minimum for maximum flexibility, but like a mixed approach myself. 
  • March 25 2009
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