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Home » Mortgages

Down Payments: How Much Should you Put Towards them?

Last updated by on 57 Comments

A down payment on a home mortgage is serious business.

The term “mortgage” originated in France with the meaning of “death pledge”, after all. Quite literally, for many people, once they take one on, they’ll carry it to their death.

I’ve read dozens of retirement stories lately where the retiree is still paying off a mortgage. As a side note, if you still have a mortgage, you should not be retiring. Numbers-wise, I suppose you could, but you are rolling the dice if you think a cushy pension will continue un-interrupted to allow you to do so..

But let’s not jump too far ahead of ourselves. For beginners who have not bought a house, what is a down payment, you ask? A down payment is the amount of money you apply directly towards a loan – in the case of a home, a mortgage.

The average down payment on new loans for home purchases is now more than 20%.

But is average good enough?

20% Down Payment Avoids PMI

down paymentLet’s start with this.

One of the biggest financial mistakes I’ve made was buying a big house almost right after graduation and over-financing it.

You can avoid PMI (private mortgage insurance) – which is where your lender literally charges you to pay for the insurance that covers their ass if you default on your loan – by putting 20% down on a house.

My wife and I, unfortunately, hit ourselves with a double whammy. First, we didn’t have any savings to put towards the down payment. Second, we bought too much house.

No savings meant we had to either take PMI or a second (piggyback) loan. Crunching the numbers led us to take out a HELOC at a 9% APR instead of PMI. We were paying over $1,000 a year in interest on this second loan, and it all could have been avoided if we had first saved up 20% for a down payment.

I’m not sure if piggyback loans or PMI are as common place today as they were pre-financial collapse, but they are both traps. Which brings me to my first piece of advice:

NEVER PUT LESS THAN 20% TOWARDS A DOWN PAYMENT ON A MORTGAGE.

Nobody NEEDS a home, and if you can’t save up at least 20%, you are not ready for one. Stick with renting.

This, believe it or not, is my “soft” view on down payments.

At Least 50%, Why Not 100%?

Mortgages right now are still around historical lows of 3.5% (15-year) and 4% (30-year). Great time to buy, right?!

Here’s the thing. The percentage rate you pay on a mortgage is an annual percentage rate. This means that you pay that interest rate every month (annual percentage rate/12) on whatever the remaining balance is. If you’ve never seen an amortization table, take a look. It will make you puke.

On a $200,000, 30-year loan at 4% interest, you would pay over $7,000 in interest for each of the first 6 years. Three-quarters of your payment would go towards interest payments while only one-quarter would go towards your loan principle. Over the course of the lifetime of the loan, you would pay over $143,000, almost three-quarters the original value of the original home.

4% guaranteed returns should beat inflation, convincingly. While you might be able to do better investing, that is nothing to scoff at.

If I could go back and do it all over? I’d probably put at least 50%, maybe even 100% down towards a home purchase. In some parts of the country, this would be almost impossible. In Michigan? It’s not.

Realtors and bankers are going to hate me for saying that (ever seen the National Realtor Association “never been a better time to buy” commercial?), but the bottom line is that the more you save towards a down payment, the sooner you’ll be 100% debt free. And the more secure you are from foreclosure and financial hardship. There are always exceptions out there, and local real estate markets might make buying/loan much more appealing than renting. But if you want a general rule, there it is.

Oh, but what About the Mortgage Tax Deduction?!

Whenever someone talks about deducting mortgage interest on a tax return as a blessing or a reason to buy a home, I cringe.

You can’t add a mortgage interest deduction on top of a standard tax deduction. For example, the 2014 standard deductions are:

  • $6,200 for single filers & married filing separately
  • $12,400 for married filers
  • $9,100 for head of household
  • $1,000 for dependents

In my mortgage tax deduction breakdown article, I highlighted a common scenario where you could end up paying $11,873 (mortgage interest + property taxes) that you’ll never get back, only to get a whopping $41 in mortgage tax deductions.

So, there you have it.

Down Payment Discussion:

  • How much do you think one should put towards a down payment?
  • How much did you put towards yours?

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57 Comments »
  • Trevor says:

    The first house I ever purchased way back in 2002 was the best home purchase I ever made. The bank had a special “first time home buyers loan” which consisted of $0 down, no PMI and a floating rate that started at 5%. Over the years the rate has dipped to as low as 2.75%. This was the first of many houses that I have purchased and has been the best mortgage that I ever had. All of the others have been similar to your example above. However they are all rentals now so, completely different ball game.

  • camelian says:

    I agree, please never buy a house without 20%, and definitely do NOT take out an FHA loan with less than 20%. I bought my first house last September and was a completely n00b going into it. While I was fortunate enough to have a great realtor that stuck with me for 6 months and landed me the perfect home for my budget and steered me away from potential disaster purchases, I did go for the FHA loan and only put 3.5% down

    I actually don’t regret buying the house when I did because I’m currently renting out 3 rooms and am able to make hefty extra principal payments on my mortgage each month. I do wish I opted for the 2nd mortgage or at least conventional loan because then I could drop the PMI as soon as I hit 78% LTV. Right now I’m stuck with PMI for at least 5 years, even if I pay down to 78% before then (which I probably will at the rate I’m going)

    The question I’m now debating is whether or not I should refinance to save 4 years of PMI (~$4800) and .5% interest rate drop. It would leave my savings in the 4 digits, which is why I’m hesitant

    • Amanda M says:

      Do you homework when it comes to re-fi’s, there are usually several options. Typically (maybe always) you need to have 20% down.
      I recently refinanced my home to switch to a 15 yr mortgage. The bank that was holding my mortgage offered a re-fi deal with closing costs that totalled $495. There was no in home appraisal, so when that came back with me at 18% of the homes value in equity, the bank “generously” offered to piggy back the rest, with a few extra fees of course. Instead I paid ahead to get 20% down and closed with a payment ~$40 more per month to be paid off 13 years sooner. If I had gone with the traditional refi, closing would have been about $3500 more, but the interest rate would have been about 0.4% less. The payback period for this was 5.5 years, which I was not comfortable with since I plan to sell in about 3 years.

    • Jack says:

      Buy a house with 20% down to avoid PMI is a great idea. However with the way rates are going is it worth saving a few thousand dollars in PMI and getting a rate 1-2 % higher than what they currently are. Say you want a house that costs $200,000 and can get a rate at 3.5% but only have $10,000 to put down. You would pay around $7,000 in PMI during the life of the loan and around $110,000 in interest. Now say you decided to save until you had $40,000 to put down on the same house but it took a few years and now your rate bumped to 5%. Now while you don’t pay anything in PMI you are now paying $150,000 in interest meaning in total you are spending $33,000 more in total by waiting to have 20%. Now that is all saying the home value now is the same in a few years as well.

      I agree if you have the money to put down do it, but if you are at an early point in your life where you dont want to dump money into rent and would like to take advantage of rates and home prices where they are now, the most logical solution is to put what you can into the house and buy now. You can always pay more on your mortgage initially until you hit the 80% mark and tell the bank to screw off with PMI.

      Just a thought

  • John says:

    I will preface my comment by admitting that i am a banker so i might be biased but i think this post is dead wrong. I’m sorry but this post is ridiculous. To claim that nobody should buy a home without 20% or even 50% down and present that as absolute truth is just plain wrong. The reality is that people can still buy a home for cheaper than rent right now. I have some people buying homes with no money down, paying PMI, and their mortgage payments are still cheaper than rent. Even if they set aside an extra %10 of their mortgage payment each month for future repairs, they would still be paying less than rent. Because of this they will be able to save more for retirement, not to mention the equity that they are building in their home. now this might not be the case for everybody but I know it is in many markets. So to say that 20% down is the only way to go is kind of foolish, and frankly I’m kind of angry that you claim to know so much about buying a house when your only knowledge comes from a couple personal experiences. It may be right for you, and you only. That’s fine but dont claim it as universal truth!

    • Mike says:

      I agree that it is possible to buy a house with PMI, and still have a lower monthly payment than with rent, but there is added risk of putting next to nothing down. What if the home value continues to go down? What if the house becomes worth less than the value of the mortgage? It could be a sticky situation if you need to sell, and you are under-water. Having a 20% down-payment will give you some breathing room. I’d rather pay the 20% down payment to the house, than an extra monthly payment to my bank.

    • +1 says:

      +1 to John. This is pure fiction.

  • Mike says:

    I’m buying a house in October, and planning a down payment of 20% to avoid PMI. I could put down more than 20%, but I don’t think I want to. I like keeping my cash liquid. With a 20% down payment, my 30 year mortgage payment (including taxes) will probably be close to my current rent. I’ve run the numbers through spreadsheets multiple times.

    Instead of putting down a huge down payment, and leaving myself with only a few months worth of living expenses, I’m planning on keeping about a years worth of living expenses in cash, and opening a taxable stock market index fund account with the left over, and start investing a little bit each month.

    $125,000 house
    $25,000 down + closing costs
    $100,000 30 year loan @ 4% interest
    ~$750 monthly payment, principal, interest, taxes
    ~250 investment in taxable index fund to follow S&P 500. This is approximately what I would pay, extra, if I decided to get a 15 year mortgage instead of 30 years.

    • LMo says:

      What about insurance? My homeowner’s insurance is almost half my mortgage payment and 3x more than taxes.

      IMO the monthly cost of a house can only be comparable to rent if principle, taxes, interest, and insurance are all added together.

      • Nick says:

        I also like to add in the cost of maintenance and repairs when comparing housing costs to renting costs. As a renter, when something breaks, you aren’t responsible for the cost or taking care of it. When you own a home, you are responsible. I did some research, and my rule of thumb for budgeting repairs/maintenance is 3% of the house cost. So for a $125,000 house, I would personally budget in an extra $3,750/yr or $312.50/mo. Owning a home is more expensive than you think!

  • John says:

    If you have to sell, you either lost your job or you had a job transfer. If its the former, I’d much rather have that 20% in my bank account! If it’s the latter, and your mortgage payment is cheaper than rent, rent it out….duh.

    • John says:

      Sorry…I’m just fired up about this one. I don’t mean to be rude but it’s a personal preference, not absolute truth. If you feel better about putting 20% down, there is nothing wrong with that, unless you have other debts that need to be paid off first, and a substantial emergency fund first.

      • G.E. Miller says:

        Agreed. This post is my personal preference and not an absolute truth for everyone in every situation. Others are welcome to share their views – and I’m glad they are!

        My opinion is that if you simply can’t put 20% down, the law of averages may not be on your side and you probably aren’t where you need to be in order to commit to buying a home and paying the mortgage for the next 15-30 years of your life – especially in today’s state of disloyal employers.

        Choosing to not put 20% down, when you can afford to, is a different story. But paying PMI when you could avoid it? Not my preference.

    • jan says:

      What if you have a job transfer? My husband could not find a job locally and had to go out of state…We live in Florida and he had to move to SC. Well, I am having to live in FL, because we are so underwater on our house! We have to decide rather to walk away and use my retirement to buy a modest home ($50 to $60 thousand) or try to rent our current home and hope it goes from $80,000 to $150,000. We did not buy a big fancy home, we did not take out extra cash. We just happen to live in one of the hardest hit areas in regards to the home crisis!

  • I have this argument with my Dad at least once a month. He makes all the arguments that you counter in this post. He always spouts the tax deduction and interest rates being less than investment averages. He even had me doubting my own views (which match yours) for a while.

    My wife and I rent. We have money saved, but here in Long Island, New York, putting 50% down on a house is very difficult, even in this market. We will continue to rent, save and be frugal.

    Thank you for reaffirming this for me.

  • Mandy says:

    I completely understand that some people do not take homebuying as seriously as they should. But to suggest someone wait to purchase a home when they only have over 20% down, possibly even 50% is a bit extreme, no? As a young single woman living in a VERY expensive market (DC), I would probably end up having to wait until well into my 40′s if I were still single until purchasing a home. With the expensive cost of rent in this area, it’s utterly preposterous to rent for so long. I think your article makes some good points, but don’t forget that alot of people don’t have the luxury of a less expensive market, where saving 20% down would only mean 30,000 as opposed to 100,000, or dual incomes and savings to afford it. What is the advice for someone in that position?

    • G.E. Miller says:

      I would recommend they move out of DC ;-)

      • Good point and I think you already answered this with:

        “Nobody NEEDS a home, and if you can’t save up at least 20%, you are not ready for one. Stick with renting.”

      • Darren says:

        Coming from NJ, I hear you Mandy. Many people who think they have life figured out come from areas of the country that are in a whole different world. Saying “Leave your friends, family, and the area you love” is an ignorant solution. However, adjusting your life style to afford a lower cost of life is usually do-able when you match up what you need and don’t need in your daily DC life. For single people in their 20′s that have their heart set on a home, I’d recommend finding some roommates, taking second jobs, spending free time researching how to boost your career and paycheck, avoid eating out…..it’s things like these that will get you that original down payment.

        By the way….I’m looking to buy a $400k home with 10% down. After doing this I’ll be able to save about $2000 a month which I’ll be putting into index funds and growth stock mutual funds, so I’m not too worried about not putting enough down. The best thing you can do for yourself is to spend all your free time trying to figure out how to increase your income!

    • camelian says:

      You must keep in mind that maintenance costs are your responsibility when you own a home. And chances are that there will be many things to take care of as soon as you move in unless it’s a new construction. If you’re already tight to where you can’t afford to put down 20%, having extra maintenance costs would be an extra blow. Having a major appliance or HVAC go out can be quite costly and you can’t simply ignore it. Your monthly mortgage payments are also much higher if you’re only putting down 3-5%. Perhaps, as mentioned earlier, it would be better to look at lower price range if you still want to buy now.

      There is another other scary thing about PMI. While it’s true that you can drop it once you reach 78% LTV chances are that if you are only making the required payments, you’ll be paying it for a long time. Before I started making extra principal payments on top of my regular monthly mortgage payment I calculated it out and I would have to pay PMI for 10 years! By the end of the mortgage I would have paid 90k in interest and another 12k in PMI on a 117k loan!! This is in contrast to about 70k in interest and no PMI if I had 20% down.

    • RS says:

      @Mandy – I feel your pain, same region & circumstance (single woman in DC). Not helpful advice to those that say “move out of DC”… I get the feeling that G.E. didn’t fully read your comment.

      I bought: 10% down, 10% piggyback, 80% primary and a little left for savings. The only reason I managed this was because I lived with my parents for 2 years to save up and live incredibly frugally… minimal heating/cooling, never went out to eat/drink, etc.
      Over the past few years, it’s gotten more comfortable. But I made the “sacrifice” because I wanted to own. It truly comes down to what you’re willing to do to make it work.
      If this is something you really want, I’d suggest renting a room in someone’s home (easily half of typical rent, plus electric/water/gas/internet bills get split). This is what a few of my friends have done… it does take time and discipline.
      The only things I allowed myself to do, as I saved up, were to attend my friends’ weddings.

      I don’t think 50% makes sense, but I’d do what I did, and shoot for 10% (in 2008, when I bought, there were only a couple lenders who had this available). Esp in the DC area, property values have been fluctuating, and 10% provides some immunity.. this is the only reason I was able to do a refi. My property value went down, but since I had 10% down, the lender worked with me since I was only a couple percent away for 80% ltv.

      Also, renting forever isn’t the end of the world. Everyone’s math works out different – it’s based on their income and what they spend to be healthy and happy and where you’re looking to buy. You need to do the math for yourself and attempt compare rent in a certain neighborhood to buying in that same neighborhood. For me, on a month-to-month basis, it was a bit more than double to BUY vs rent.
      But I wanted to buy anyways. It was risker and doesn’t make sense for everyone. But it made me happy and you can’t put a price to that.
      It doesn’t have to make sense, as long as you think through the consequences and have a way to deal with the unexpected (emergency fund).
      It’s daunting, but not impossible :)

      • KELP says:

        If you end up taking the PMI and your mortgage rate looks like it will be too expensive, you can buy a house with a little extra room and rent out the basement or spare bedrooms. Make sure you have a buffer of savings for the time in between renters, but this can allow you to pay off your mortgage sooner or, if you’re a risk taker, to meet your mortgage. Renting in the DC area is only getting more expensive–At the cheapest here, you can rent a room for >$800 or a one bedroom apartment for >$1400. Now imagine that instead of paying that to someone else, you are charging that to rent out part of your home, making good payments toward your >$3500 mortgage. Suddenly, buying a home becomes a lot more possible. Also, your mortgage payment won’t go up each year(though your taxes will!), so you can plan ahead. If you’re like me, rent prices are rising faster than your income. I’m still managing to put away money toward saving for my down payment, but I want to jump on the housing market now before it goes back up, or I’ll be in an endless trap of saving for an ever-growing 20% down payment. Has anyone ever rented out in this way? What advice do you have for looking for your home and setting up this system? I’m hoping to buy a home sometime next year.

  • Warren says:

    NEVER PUT LESS THAN 20% TOWARDS A DOWN PAYMENT ON A MORTGAGE.

    I’m curious what your advise to someone who will be buying a home eventually but can’t come up with this 20% today would be.

    I’m a tenure track professor at university where real estate is reasonable, and will be buying a home eventually. However, at the moment, my wife (also with an expensive education) is not working because we have three young kids, and we have students loans, and preschool costs, etc, and so in the end, our discretionary income is only a few hundred dollars a month, which means we will are a long way from 20%. In four or five years, my youngest will go to school and the expensive student loans will start to be paid down, my wife will have an income, etc, but in the mean time, savings just ain’t happening, regardless of how many subpar prepaid phone plans I elect for.

    I’m not interested in flipping the house. I want somewhere to live when I retire. It’s common to say “not everyone needs a house” but I would say guess that most if not all tenured professors with kids at my university with kids, so it’s not like I have some crazy dream beyond by mean.

    So do you really think I want to waste 6-9 years of renting, and risk a entering mortgage that will goes well into my retirement?

    • Natalie H says:

      I think it really comes down to a comparison between the cost of renting and buying. Most first time homeowners don’t understand the costs involved in owning a home. Most just look at principal and interest. However your payment with taxes and insurance will be about 40% more and the maintenance and upkeep will be about another 40%. Not to mention decorating, new furniture, possibly appliances, and generally making the house your own. Apartment dwellers are frequently surprised by the many times higher utilities in a single family home. It adds up quickly. Plus after closing you still need several thousand in the bank for possible repairs. If funds are tight, make sure you can afford to assign 2x the principal and interest to home ownership costs and still be able to save. If you only have a few hundred in wiggle room right now and you buy a house, you could be in for a lot of trouble down the road. There’s a reason houses can be jokingly called money pits.

      I’d recommend waiting until your wife is working again and then getting a 15 year mortgage that you can afford on just one income. The difference in monthly payment between a 15 and a 30 year mortgage is surprisingly small. That way you can pay it off well before retirement and not stretch yourself too thin now. The amount of down payment is personal preference, but you should have a significant amount in savings regardless of whether you choose to use it at closing.

      Source- I’m a former Realtor.

      • Warren says:

        Natalie -Wow. This is the probably the best advice I’ve heard yet. I’ve posted versions of this question to various people and websites, and most people limit their response to something like “if you can’t afford it, shut up already .” No one has suggested and I’ve never considered 15 year mortgage, as I thought these were for richer folk who could afford 50% down in the first place. But you are dead right. My wife’s income will more than make up the difference in 15 to 30 year payments and we will actually own the house quicker. I’m 35 now and didn’t want to wait until 42 to get into a 30 year, but 15 year should be no problem.

        Thanks. I don’t know why these renting vs owning discussions don’t mention 30 vs delayed 15 year options.

        • camelian says:

          You might also try taking a look at an amortization table to get a scary glimpse into the reality of a mortgage.

          My home was 120,000 and I went with 3.5% down FHA. The first few years, the mortgage is right around $1,000 but only about $160-$180 of that is actually hitting principal. Like Natalie said, you will also need at least a few thousand for possible repairs, appliances and furnishings.

          I’ve heard of some families renting out one of their rooms so if you are comfortable with that or maybe have a friend needing a place to stay, that could be an option to help with the mortgage. As long as you’re not going conventional, you should be able to drop the PMI at any time

    • Nightvid Cole says:

      If you can invest the difference between mortgage + taxes +maintenance and your rent, I think by the time you retire, you’ll be able to pay cash for a home.

      A place to live when you retire doesn’t require you buy now. Merely that you don’t squander your extra cash each month on depreciating consumer products!

  • Laura says:

    I am a 22-year old woman currently looking into purchasing my first home. I am planning to buy a $120,000 house and my plan is to put 20% down but to make sure I have enough in savings that I could have put 50% down and been okay. I intend to have renters in some of my bedrooms for the first several years so that I can have it paid off by the time I’m 30 and by having a large cushion of savings (the remaining 30% of savings which is earning a steady 3%), I can cover any periods of time when rooms go unrented (though I am making sure to buy a house that I can afford even if all rooms are vacant). Then when I get to the point where I have enough in savings to pay the house off, I will…it’ll be a lovely day!

    I personally believe putting 20% down is incredibly wise (though like you mentioned, in some markets it is more difficult than others). If you are in an expensive market where 20% is somewhat unrealistic however, I would tend to suggest buying much less house than you can “afford” to pay for each month and to consider getting renters so you can accelerate your ability to get to 20% and drop PMI insurance. After all, if your goal is to simply not pay rent, you’ll have that, plus you’ll be the one collecting the rent. As far as buying a smaller house goes, you can always move up to your dream house later on once you’ve built lots of equity in your starter house and by doing so with a significant down payment, you will help to protect your dream from becoming a nightmare.

  • Ron Ablang says:

    Frightening. I know quite a few folks that refuse to pay off their house (even though they could) due to the mortgage tax deduction. Also, most of these folks are past the midway point of their loans so less deduction b/c less interest is paid.

    I plan to finish paying off my mortgage once the balance is within ‘reasonable’ reach of my savings.

  • George P Burdell says:

    I put down 20% when I bought my townhome back in 2006. I’ve lost that and I’m underwater 50k… All I can say, is if you’re planning to buy make sure it is for the long term and don’t plan on having access to that 20%. So make sure you don’t deplete your emergency fund to buy a house (if anything your emergency fund needs to grow).

    As to paying off your mortgage earlier. I think it depends on your situation. Without my mortgage deduction; I wouldn’t qualify for a full Roth IRA contribution. However, I think the more important question is do you think you can get more return by investing.

    If you’re mortgage is at 4%; then putting a bigger deposit or extra payments will get you 4% saved in interest. Actually less, as the deduction offsets that amount based on your tax bracket.

    If you instead invest that amount what rate of return would you expect? If it’s more than 3-4% then you’re probably betting off investing.

    • Kara says:

      You state that if your return is better than 3-4% you would be better off investing, but you’re not taking inflation into account. When you consider interest of 4% and inflation of 3-4% you would need to have a return of 7-8% to break even.

      • Ben says:

        But unlike traditional investments, real estate is sometimes considered an inflation hedge.

      • Nightvid Cole says:

        No, 4% interest is even with 4% return. Yes, invested dollars inflate, but so do dollars owed on the mortgage balance. It’s a wash.

        The tax deduction is also roughly a wash with the taxes on your investment income.

        • Ben says:

          “Yes, invested dollars inflate, but so do dollars owed on the mortgage balance.” – Actually, the dollars on the mortgage do not inflate assuming your income keeps up with inflation. Mortgage dollars are fixed if you are in a fixed interest rate environment.

          • Nightvid Cole says:

            Clarification: By “inflate”, I meant “undergo a loss of purchasing power due to inflation”.

  • Ben says:

    I think the amount you put down on a house is a personal decision driven by a myriad of factors including your job situation, earnings potential, long term savings goals, and location. While I agree that putting down 20% is ideal to avoid PMI, I don’t think it’s as big of a deal as this article makes it out to be. I will draw on my personal experience.

    My wife and I bought our first home in 2009 slightly after the housing meltdown. We had approximately 10% down but we would have been left with little savings in our bank accounts. We are both accountants with a stable income so we crunched the numbers, ran the scenarios, and picked a price point. We wanted to continue to save as we have in our retirement accounts and savings accounts. We purchased the home and got a mortgage at a little over 5% for 30 years.

    Our PMI was approximately 100 a month. We recently refinanced to a 15 year mortgage at 3.375% after 2.5 years of original payments which reduced our PMI to approximately 60 a month. We had put a few extra savings into our home and we able to request the drop in PMI after 5 months into our new loan. Total paid in PMI was 3,300 ( approximately).

    Even despite the PMI and the housing crisis, I was happy when I got my appraisal report to learn that my house appraised for approximately 10k more than I bought the house for. In all, we were probably 5k ahead after factoring in closing costs, small renovations, and additional items we needed to get settled in the house.

    I recognize my case is just that… One case in a sea of many, but you can easily see that if there is some appreciation, the PMI is not this daunting hurdle to overcome. Also, our income has been steadily increasing which just opens up more room for additional savings or retirement savings. One thing the tax article didn’t discuss is that you also get to deduct your state taxes paid as part of your itemized deductions as well as your PMI premiums.

    Moral of the story…. Everyone needs to make their own decisions in how much to put down on a home and I hope my long rambling post gives some solace to those who don’t want to put 20% down.

  • Matt says:

    Where exactly do you live while you save 100% for a home? Rent? Oh, and give 4/4ths of your money away instead of 3/4ths?

    You failed to touch on that angle.

    • Nightvid Cole says:

      If rent is less than mortgage + insurance, taxes, and maintenance PLUS what you could earn on your down payment in the stock market, you still come out ahead renting. IN other words, with the same TOTAL out of pocket each month (housing + investment) your portfolio as a renter would go up FASTER than your equity in a home would go up. Thus, IN THE LONG RUN (i.e. retirement) you are better off renting and investing the difference. 4/4ths of rent =/= 4/4ths of mortgage, so your argument fails.

      Unless, of course, you would use your extra money each month to upgrade your lifestyle. In which case, you probably need the “forced savings” of a mortgage or whole life insurance.

  • Nick says:

    Great article G.E.!

    I am really confused about all the chirping in the comments.

    My goal is financial independence, and being free of the shackles of debt. There is no reason why I wouldn’t want to put a huge chunk of change down on a house, because the sooner my home is paid for the sooner I am free. That is what I value.

    To the chirpers- If you don’t value being out of debt, then by all means go borrow as much as you can. Run the numbers, do the math, figure your tax “savings”, and tell yourself it’s better to do that. If that’s what you value and have learned from your banking experience and accounting and financial know-how, then go ahead.

    As for me, I choose to live free.

    • Ben says:

      The fact you put more money down on a house does NOTmean you are out of debt faster. Also, just because you put down 20% doesn’t mean you’re financially better off than people who don’t.

      Hate to say this but if your goal is financial independence then you need to understand the value of leverage in personal finance. Saving tons of cash and dumping it into one area (real estate) is ill advised. If it takes you another 5 years to enter the real estate market, you’ll be paying higher interest rates and likely seeing slightly higher real estate prices.

      Even the radical no debt advocates recognize that certain debt is not the bell end all of financial independence. Through responsible lending, you can achieve your long term financial goals.

      • Nick says:

        It just seems the majority of people don’t truly understand how to use leverage correctly. What I’m talking about is not “saving tons of cash and dumping it into one area”. Just because I want to get out of debt fast doesn’t mean I’m still not saving through other avenues like equities, or even REIT’s, where I still have access to real estate.

        Everything is about risk. I understand that waiting 5 years to enter the real estate market has risks (interest rate changes, real estate prices). But you have to understand that buying now with a small(er) down payment, possibly paying PMI, paying more in interest, has risks too.

        Leverage can be great for a small fraction of people who know what they are doing. Ironically the people who seem to preach the leverage approach to wealth seem to the one’s who have more debt, lower (even negative) net worth’s, and thus seemingly the furthest away from financial independence.

      • G.E. Miller says:

        “Also, just because you put down 20% doesn’t mean you’re financially better off than people who don’t.”

        If the person who doesn’t put money down isn’t earning investment returns greater than the APR on the mortgage (+ PMI, which is usually around 1% extra), each and every single year, then the 20% camp is actually better off financially.

        • Ben says:

          That assumes there is no appreciation on the home over the same period it would take you to save the additional down payment. Also, since I do get a break for the interest, real estate taxes, and now my state taxes, you would need to factor that in to your statement.

          I guess we will have to agree to disagree. I think that is why they call it “personal” finance. I think these posts are helpful to present both sides of the argument to or not to enter the real estate market.

  • darnell says:

    This article fails to look at anything else your cash could be doing. Put 15% down and keep the cash for another business idea that will yield better returns.

    What about buying an undervalued home like a foreclosure? Put 10% down and invest cash in repairs?

    I just don’t get the end game here? Cash is used in much better ways than tied up in a house.

    This post is based on two personal experiences yet comes from an expert

  • Julie says:

    Very good article, GE. I especially liked on other article on the mortage tax deduction calculation. Like you once said, this site is self-selecting for individuals that are pretty finanically saavy so I like reading people’s comments as well.

    I put down 20% on my house with an interested of 5.125% (no points) in 2011. I thought about refinancing lately since there’s a 1.5% difference and even considered 15-year loan. When I run the calculations over 30 years, it would be better not to refinance and invest the extra payment or even the cost of refinancing into a balanced index or mutual fund. (Especially cause I can’t seem to find those amazing too-good-to-be-true, no-interest, no-cost loans that people brag about…)

    Just throwing this out there but it does sound like you already considered it when you said beating 4% inflation isn’t something to scoff at.

    Again it does come down to risk tolerance, personal financial goals, and where you are in life… 50-100% down for a 20 year old is alot when you have 40-50 year left to ride out the stock market, no?

    Thanks again for the thought-provoking article.

    • G.E. Miller says:

      Yes, but how many 20-year olds should be buying a house?
      Unless you know you’re going to be staying in one spot for a while, you shouldn’t buy. The cost of buying a home, outside of the mortgage is significant – closing fees, moving fees, home inspection, etc. Then, if you sell, there are the realtor fees.
      With as often as twenty-somethings change careers, it really doesn’t make much sense to buy (I say this after having bought twice in my twenties).
      Having been there, done that, twice? I wouldn’t recommend it unless you live in a really low-cost market with a low vacancy rate.

  • slinky says:

    We plan to buy next year with 6-8% down. Getting to 20% or more wouldn’t be hard given another year or two, but we aren’t willing to wait. In our case, the lack of house is holding up other lifelong dreams and that’s really frustrating and totally unacceptable. If it was just a matter of I want a house and I want it now, I’d probably hold off that extra year or two. but I’ve found that there are times when the”smart” way isn’t the right way. Some things are more important.

    We are however, in otherwise good shape. We spend much less than we earn, retirement is being funded, I’m fully funding a HSA, emergency funds should be at 16k+ by then, budget has PITI, PMI, maintenance penciled in for next year with some extra breathing room to account for possible under estimating. Utility increases are not penciled in, since they’re pretty hard to estimate, but there’s some extra room in the budget as well as expected yearly raises, which we never include until they actually come through. And of course, line items for savings are staying put. Were also targeting a price range that is just under 2x our annual salary.

    We may not be doing the smart thing, but at least were not being totally stupid about it, right? ;)

  • العاب بنات says:

    You might also try taking a look at an amortization table to get a scary glimpse into the reality of a mortgage.

    My home was 120,000 and I went with 3.5% down FHA. The first few years, the mortgage is right around $1,000 but only about $160-$180 of that is actually hitting principal. Like Natalie said, you will also need at least a few thousand for possible repairs, appliances and furnishings.

  • We are looking at buying a house by January 2014. Our apartment lease is up then, and prices are relatively affordable in Texas.

    I still balk at the cost of a house lol. Have you thought about writing a post on the different types of housing costs you have encountered? For example, by how much did your water bill go up? How much was homeowner’s insurance?

    We plan on putting 20% down.

  • Kellie says:

    I completely agree with the 20% down to avoid any pmi. Here’s the thing in my case, I bought the home for 135,000 and put my 20 % down. I also have 10 years of equity into the house on 30 yr mortgage.( Still owe 97,000 ).I have foreclosed due to toxic mold, flooding,and to many other things to mention.Home ins. would not cover a dime of the needed repairs.My home fell into a underwater mortgage situation due to the costly repairs exceeding my ability to be able to pay to fix them. Realtors told me my 135,000 dollar house was now only worth 70,000 and that was if I did all the costly repairs.( an additional 30,000 )so i was forced to walk on my 20% down and 10 years of payments! And the real kicker is they sold it after the foreclosure was all said and done for 55,000 dollars! Now I get to see if they are going to come after me for the balance on the 97,000 I owe them minus the 55,000 they sold it for. I was told the pmi that I did not have to have because of the 20 % down could come back and bite me in the but because the mortgage company will not be paid off now for my foreclosure!!I am in Michigan and if anybody has any advice on if I will be pursued legally from the mortgage company let me know please!!

  • springfield mo realtors says:

    You must still be able to have a decent living in order to afford a house. If you can’t afford it then you will problems coming out everywhere! have a savings fund first and an emergency money before planning to buy a house.

    Rose

  • Jake Thompson says:

    Suppose my friend April is considering to refinance her mortgage. She bought her house 40 months ago at $140,000. She paid 4% as her down payment and closing costs. Since she has an excellent credit history and relatively stable income, her mortgage rate was 4.75% for 30 years. Since her down payment is less than 20%, she had to pay monthly mortgage insurance premium which is $61.5 per month (premiums are automatically terminated when the loan balance falls to 78% of the original property value). Recently, mortgage rate has been dropping and she is considering to refinance her mortgage. She would like to consider 30 year mortgages based on her own financial situations. She talked with a mortgage banker and got the following options:

    a) 3.75% 30 year conventional loan with out of pocket closing costs of $1,200

    b) 3.5% 30 year conventional loan with out of pocket closing costs of $2700

    c) 3.25% 30 year conventional loan with out of pocket closing costs of $4,000

    Based on the information, what are her monthly mortgage payment on the original loan.

    How much does she need to refinance now?
    Does she still need to pay the mortgage insurance premium after refinancing? Why?

    5) How much should her monthly payment be under each option (a, b, and c)? Show your calculations.

    6) Would you suggest her to do the refinancing or not? Why? Notice that monthly payment is reduced but she need to make 360 payments plus closing costs under the new mortgage versus 320 payments in the old mortgage.

    7) Which option would you suggest her to take? What factors would affect her choice and how?

  • MV says:

    GE
    Great article. I would like to discuss my specific situation and get our input and opinion. Can I email you directly? If so, what is your email address. Thanks

  • homedecor says:

    Dear GE, I have been reading your posts for a while and they are great. This article is excellent. I would like to hear your opinion on the following scenario:

    Lets say that I am considering buying a house that is $100K. After putting money aside for emergencies, etc., I can afford to put a down payment of up to 50% of the value ($50K) and finance the difference.

    The big question is should I put $50K down or just 20% down ($20K) and invest the difference?

    I would like to share some thoughts with you:
    1. The higher the down payment, the lower the monthly mortgage payments and therefore I will have more money each month to either make extra payments or invest.
    2. If I put down $20K and invest $30K, there is always that risk associated with investments and the mythical 8% return on investments may not happen at all. Furthermore, assuming the investment does give me 8% return, I would have to pay taxes on capital gains, which in my tax bracket is 15%, so the 8% actually becomes 6.8%. So now you are comparing a guaranteed 4.375% interest on the mortgage vs a possible 6.8% return on investment with risk.

    So far, I think that a 50% down payment is a better idea.

    This is where I am confused:

    Assuming that the property value will go up by say 5% per year (which I think is reasonable in the area, actually they are predicting that home prices will go up between 8 and 10%) in one year that house would be valued at $105000. Let’s also assume that all the money that I paid the bank went towards the interest.

    If my down payment was 50% ($50K), $50K is the banks and $55,000 is mine, which would represent a 10% return on investment (that I don’t have to pay taxes on).

    If my down payment was 20% ($20K), $80K is the banks and $25K is mine, which would represent a 20% return on investment (that I don’t have to pay taxes on).

    Now, I am thinking that it is better to put a 20% down payment.

    Is my math correct? Am I missing something? What do you think is a better idea? 20% down or 50% down?

    Thanks

    • Ben says:

      Your math is spot on except for the comparison of your 6.8% after tax return in your investments compared to the 4.375 mortgage rate. Any accelerated payments aren’t really yielding you 4.375%… they are saving you from paying the interest on the future principal amount. But you’re right, the appreciation of the asset can lead to an return… but I know GE will disagree that a house is not an investment.

      If it were me, I would put the 20% down to avoid PMI and then make extra principal payments as you see fit. You can then use your 30K of cash to invest or be an emergency fund. General rules governing the logic here is that you do not want to dump a large chunk of cash into a non-liquid asset.

      Again, it all comes down to what your goals are. If you’re focused on being debt free, then maybe the higher downpayment makes sense. Otherwise, you can utilize your excess cash for other means. Hope this helps.

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