Down Payment vs. Investment Income?
Let's say I make about $85K a year, and have saved up $100K ("sitting in the
bank") all available for the down payment.
I'm looking at a house which costs around $360K and wonder if it would make
more sense to put down a huge down payment and make smaller monthly
payments or use the "$100K" to generate income (CDs, mutual funds, stocks,
bonds, whatever) with a smaller down payment but larger monthly payments.
Just to throw some numbers around (the house I'd be looking for is in the
$350K area):
30 year fixed
APR --> 7.125% (zero points)
$350K loan amount --> $2358.01 a month
$250K loan amount --> $1684.30 a month
$673.71 a month difference
I also wasn't clear on the mortgage interest tax deduction -- at first glance
(without understanding the details), it seems like the 30 year would be
better (vs. 15 year) if you can take the same/relative deduction.
I'm interested in understanding how others would think through this
situation.
These numbers do not make much sense to me. They presume that a
bank/mortgage company will lend you money on a house with virtually
no down payment--something that would come as a surprise to me.
If the bank required a 20 percent downpayment, that would take up
most of your $100K, so you would not have a problem.
Most banks would use a ratio of about 28 percent for figuring how much
you could afford to spend on housing. $85K/12 = $7,083.33 per month.
28 percent of that is $1,983.33 per month. These housing costs would
have to include taxes and insurance, so this looks to me like
something like the $250K loan scenario would be your only real option.
(The monthly payment figures you gave only include principal and
interest, with no allowance for taxes and insurance.)
Talk with a bank loan officer or mortgage lender about their policies.
I am not one, so might be mistaken on the details.
If you manage to get the loan with something left over from your $100K
that is not used toward the downpayment, it still does not mean that
you should invest that money. A general rule is that you should have
three- to six-months worth of living expenses in cash, so the
remainder of the $100K should probably be used for this purpose.