The majority of first time home buyers that I have worked with over the last few years haven't had much of a choice with the size of their down payment. They usually only had enough for the minimum, which is 3.5% on an FHA loan or no down payment on a Rural Housing or VA loan. However, other clients have ample funds for a down payment and struggle with the question of how much to put down. They wonder if it would be better to put as much down as possible and have a low monthly payment or if it would be better to keep that money and use it for other means.
here are 3 questions that every borrower needs to consider when deciding how much money to put down on a home...
1. Do I want my money tied up in my home?: Having your money tied up in your home isn't earning you any interest. It's like putting your money in a mattress. With the performance of the stock market and other investments over the past year many would argue that having your money in a mattress is a good thing. However, the value of your home is going to rise and fall regardless of how big the mortgage is. In many parts of the country home values have fallen and large down payments and equity have disappeared.
2. Will I need the cash?:It's impossible to predict all of the crisis that might occur in life. Job losses, illnesses, injuries, marital problems, family problems, etc. could all arise and any of these could require massive amounts of cash. Having your home paid for might be a small consolation if you don't have the cash to take care of these other problems.
3. Should I pay off other debts first?: Mortgage money is cheap. Of all the debt that you might have in your life (e.g. Student loans, car loans, credit cards, a mortgage) your mortgage is most likely the lowest interest rate. Also, unlike most loans, your mortgage is tax deductible. This means that if you are in the 33% combined federal/state income tax bracket, your mortgage is being subsidized by the government by up to a 3rd. Your 6% interest rate is really only 4%. It would be better to pay off your other debts first.
There are some that say that paying off your home should be the top priority before making significant contributions to other investments. If this school of thought helps you sleep better at night, than maybe that is what you should do. It's hard to put a price on peace of mind. There is no right answer that is the same for every borrower. It is going to be different for everybody. A good loan officer should be able to help you find out what is the best decision for you and your individual goals.
Comments(0)