Is it a good idea to put a down payment of more than 20% on a home purchase (like 50%)? If not, why?

Question

In my research, it seems that most people don't agree with putting down ~say 40-50% because it doesn't help with payments. ? Am I missing something?
To me, the more put down, the less the amount that gets interest tacked onto it. And if I don't itemize deductions at tax time, having interest does nothing for me.
Just trying to understand if a large down payment would help substantially.

I should also add:
~I would be a first-time home owner
~I'd like to keep the home for at least 15-20 yrs

Answer 1

It is a bad idea.

Sinking all of your savings into a house means that you are not investing that same cash elsewhere. If you are young, you should be investing that savings in an S&P500 index fund. The gain from that fund will be far more than the interest that you have to pay. As well, that interest will be tax deductable...as you stated.

The S&P500 makes 13% over the long term and allows you to deduct your mortgage interest from your income. A mortgage only makes 6-7%.

As you get older and have generated an acceptable savings for retirement...paying off your house would be wise because it is a 6-7% return with no risk. Retirees are typically able to accept this lower rate of return. But younger people should not be so conservative.

"Traverse City Agent" 's answer is dangerous. The idea that you should consider buying a more expensive home than you need is a bad idea. Homes cost money...they are expensive to maintain and the larger you buy, the more expensive they are to keep up. If you have extra money...save it...invest it...don't sink it into your home.

"Traverse City Agent" also talks about the beauty of a leveraged investment...that's great, but it ignores the fact the the borrowed portion of that investment generally costs you more in interest than the property goes up in value...and that ignores the cost of maintenance and other expenses.

The bottom line is that houses should not be seen as good investments. The stock market out-performs the housing market over the long run. Stocks are easily liquid and do not require maintenance, property taxes, insurance or utilities. You should buy the amount of home that you need...no more.

Trust me...I know.
I invested my money...instead of sinking it into my house 10 years ago. Now I can pay off my house 3 times over. Oh...and I'm not paying off my loan or buying a more expensive house just because I can afford it...because I don't NEED a bigger house.

When you have to fix the roof, re-sod the lawn, redo the kitchen, and paint the walls...you will laugh at calling a house an "investment". It costs money to LIVE in a home...whether you are renting or owning.

Answer 2

You have a lot of answers and some of them are good and some only tell part of the story.

The first thing you have to understand is that housing is a good investment due to leverage. Basically for the amount of your downpayment you get to see an increase (if the market goes up) on the full value of the property. So if you put $20,000 down on a $100,000 house, and the value goes up 5%. Your $20,000 investment made $5,000. A 20% return. If you did itemize your deductions then you could even deduct the cost associated with this investment. The return is the largest when you have the smallest down payment. Having a larger down payment does not give you an advantage.

Second, you can maximize your return by buying the largest possible property. So if you have $50,000 to put down you could put 50% down on a $100,000 house or $50,000 down (20%) on a $250,000 house. If both home gain 5% your $50,000 investment in the $100,000 house would have made $5,000. By contract the $50,000 investment in the $250,000 house would have made $12,500.

Third, you can utilize the money not in your down payment in another investment such as the stock market (although with property so inexpensive a rental might be best) and generate returns there.

Answer 3

The only time it may be beneficial to put down a small amount is when the morgtage interest is low, and you can earn a higher rate on some other investment vehicle.

For example, if morgtage interest is 6%, and you have another means to earn 7%, then a small down on the house will allow you to earn 1% more than you pay on the interest.

If the situation is reversed and you earn 6% on investment, while paying 7% interest, you're better off putting more down on the loan.

In either case you can/should deduct the interest from your gross income.

Answer 4

It depends on just how much money you have.

For example, the cheapest money you will ever borrow is mortgage money. The rates are excellent and it is your biggest tax deduction. If you get a 30 year fixed rate at 6% and are in a 30% tax bracket then effectively it is like paying 4.2% for the money you borrow.

If you can invest your money (conservatively) at say 7% then you make the spread. This is what banks do and why banks have their names on top of big buildings. They make the spread on billions of $$$ worth of loans - quite a good investment.

Keep your money to invest and put down less.

Answer 5

Personally I would in order to get the house paid off sooner. I have heard that the more you put down on a house, the higher the interest rate will be so that the bank can make as much money as they possibly can.

Answer 6

your right its a great idea. It costs alot less in the long run