I have enough money in cash for a 20% downpayment right now. The money is sitting in treasury bills on fidelity. I'm not in a huge rush to purchase, but ideally, I would like to have purchased a house by end of August, but I'm also open to waiting until 2025 since renting is cheap (cheaper than property taxes lol, not to mention the money i'll lose from interest rates) So my question is, with high mortgage interest rates, should I invest my paychecks going forward or pay a larger downpayment? I was leaning towards the latter, but I recently saw a comment from someone on blind saying that if you pay a larger downpayment and/or make larger mortgage payments monthly, even at such high interest rates, you're not diversifying your assets and locking yourself in to the local housing market. This made sense to me at first, but when I think about it now, it makes a lot less sense. I think that logic is flawed because the mortgage rates is a guaranteed X% loss on post tax money where X (so between 7-8% for 30 year) is the mortgage rate. So unless you're confident your returns in the stock market can be higher than that after accounting for taxes on gains, then it seems better to put it in the house. WDYT
It all boils down to monthly payments you will be comfortable with. Assume the worst case where you/spouse lose your job...you need to sustain payments at least for 6 months to sell the house. I personally paid for 'poinrs' in addition to 20% ( in 2021). But then also took out equity from my other home since rates were low. It was an easy decision due to low rates and my situation.
thanks. sorry, what is 'poinrs'? I think it's a typo but not sure what you meant. high interest rates really makes this a tough decision for me. there are many things i can do here: 1) accumulate a larger downpayment 2) pay 20% down and invest extra money in stock market 3) pay 20% down and keep money around liquid (maybe in treasury bills or HYSA) and pay larger downpayments or get a 15 year loan instead of 30 year #3 seems inferior to 1 and 2
We put a 50% down payment on our house at the time, and that’s what we could afford. But I wouldn’t have gone higher just to borrow less. It sucks to lock into a mortgage with such a “high” interest rate, but like you said, it’s a reliable constant over however many years you want to mortgage for. We didn’t want to put an even higher down payment because we wanted our runway and emergency funds to be able to cover more. So we have 6 months of cash, + another 6 months we left in our investment accounts. If you need the money or something happens, better to dig into your investments and cash than having to sell your house. I would imagine it’s already a stressful time, if you have to sell your house to get a chunk of money, then what? Do you rent? Move all your stuff to a small apt? With a kid? No way
This is a brilliant question. I want an answer too! I've always been in favor of larger downpayments since you have absolute control over it ( unlike stocks ). But, I am also not the best thinker out there
Yes the key is to put down enough to have a monthly payment you’re comfortable with. I have a ~7.5% rate and put down 55% to lower our monthly payment. If my partner or I lose our job we can afford payments for a couple years. Better safe than sorry in this economy.
We are planning to refinance when interest rates drop but are fine if they do not. We will also re-amortize as we pay off large chunks to bring the payment down even more. We are trying to pay off without 5 years instead of 30
Right now, I have enough for 20-30% down (depending on how much the house is). I think I can put 40-50% down right now, but it would require me to liquidate my investments and also empty out my 401(k) (i'll have to pay it back down the road). idk if i want to go to that extreme though, but what's the difference between using future paychecks towards downpayment instead of investing vs liquidating current investments and using that money towards downpayment? it seems like the 2 are equivalent, but i'm more hesitant to do the former, so something seems off with my logic
I think there is no real answer to this. 20% downpayment and 10% won't make much difference for a high value home and current interest rates. If you make a 50% downpayment then it makes sense because LTV is 50% and once refinanced you get much better value overall. I have invested only 10% downpayment with a 3/2/1 buy down by seller, with 6.75% interest rate. My mortgage did not change much if I did 20%. I plan to save that extra money for expenses and other stock and high yield accounts.
I haven't looked into all the mortgage options yet and not too familiar with the 3/2/1 buydown. why did you choose that as opposed to the more standard 30 year one?
It is a conventional 30 year loan. But ever since covid, sellers have been offering buydown programs like 3/2/1 where seller finances part of the mortgage for some period. If my locked rate is 6 then 1st year I'd be paying 3%, 2nd year 4%, 3rd year 5% and 4th year to 30 years, it'd be 6%. By then I would have refinanced if rates came down.
OP - On a side note, curious what T-bills you have and what kind of return rate they give
tbh i just blind pick the one with the highest return that i see on fidelity. i don't even know which one i have right now but it matures in mid april. i'll probably do another one for a couple months
The optimal depends on your view of where equities will go from here very real estate. Certainly you shouldn't be like 80% of all NW in real estate
i think you have to look at it from the perspective that not putting additional money in to the mortgage is a guaranteed loss due to interest, so it's not all about how much NW is in real estate but also about minimizing loss due to interest
Too naive. Buying a home with loan is essentially a leveraged investment. You compare ROI of that against investing in equities. Yes, factor in the interest when u calc ROI
At 7% after tax guaranteed rate I would pay all cash up to 750k mortgage. That’s the limit for federal interest deduction. Since you get back 3% of that 7% interest it makes sense to not have mortgage beyond 750k
I think if your mortgage interest is >6%, it’s better to put your money towards mortgage and take the guaranteed ~9% tax adjusted return.
> put your money towards mortgage does this logic apply to all of the below: 1) future paychecks (this is what my OP was referencing) 2) liquidating other net worth sources such as investments (including 401k)?
Future paychecks and stock vests, yes. 401k, definitely not. Existing stocks: Kind of depends on how much capital gains you have accumulated. I would leave them invested.
Wait for rates to drop
your intuition is right: larger down payment is wise in this market