Help with Home purchase--How much to put down

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cresive
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Help with Home purchase--How much to put down

Post by cresive »

Hello and thank you for reading my post.

I have a quick question about paying down my mortgage payments. I have about $200,000 to put down on a $650,000 home. I can put it all into the house, or save some for updates and any issues I have after I move in. Taking the latter approach, I now want to decide what is best to do. I can afford the payments in every scenario, however, my preference is to buy down my payments to leave extra cash each month.

Scenarios:

1. I can put down 20% and pay approx. $3,254/month in mortgage, taxes, etc. This would leave me with about $65,000 which is a lot of wasted money.
2. I can put down $200,000 and pay $2,927/month, but this would leave me somewhat cash-poor should an HVAC die on me.

3. I can put down 20% but buy points to drive my payments down. (Does anyone have a good calculator for doing these calculations?). T

For some reason, I think I can do a variation of #3, lower my payments and still keep some of my cash on hand for upgrades and repairs. Does anyone know how to figure out the balance of buying points versus a down payment? If there is a 4th or 5th scenario, I will listen to it.

Thanks,
Ben
daheld
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Re: Help with Home purchase--How much to put down

Post by daheld »

I've never bought points and don't even fully understand how that works. I think the important question here are:

1. How much of a true emergency fund does #2 leave you with? If you've got a healthy amount of cash left over in an emergency fund, this is fine.

2. How much of a monthly cash surplus does #2 leave you with? If you'd be able to pretty quickly replenish cash stores with this option, it's probably fine.
IMhooked
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Re: Help with Home purchase--How much to put down

Post by IMhooked »

Congratulations on saving up a nice chunk for a home! This is a great position to be in!

Clarity on how much this house (liability/expense) plays into your current monthly cash flow (income/budget) may make things more clear. What is your current annual income?

When considering purchases (house, car, new cell phone, etc.) I always found it helpful to take a look at the bigger financial picture.

For example, if I purchase the house at X and I now have a new monthly budget expense line item, how does that affect everything else (investment strategy, other debt pay downs if any--hopefully not, and life decisions coming down the pike).

It sounds like you prefer to put 20% down, have the payments as low as possible (by buying points) thus leaving you with "extra" cash. How will you delegate or earmark the "extra" cash? How do you wish the extra cash to serve you and your goals? (Putting it in a separate savings account for house related expenses that are foreseen and/or unforeseen, Putting it as extra principle on the mortgage quarterly, annually or when the designated account reaches a certain amount, Putting it towards your investment strategy, etc. etc.)

Wishing your well on pursuing your educated decision! You're in good hands here!
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sk2101
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Re: Help with Home purchase--How much to put down

Post by sk2101 »

I don't think buying points is a wise idea. Put down as much as you feel comfortable with, leaving $10-15k or so for emergencies - you don't need more than that. Rebuild your emergency fund as appropriate - you will eventually have bigger outlays such as a new roof. Then, as you can, add additional payments to your monthly mortgage so you pay it off earlier.
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cresive
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Re: Help with Home purchase--How much to put down

Post by cresive »

daheld wrote: Thu Dec 19, 2019 9:29 am I've never bought points and don't even fully understand how that works. I think the important question here are:

1. How much of a true emergency fund does #2 leave you with? If you've got a healthy amount of cash left over in an emergency fund, this is fine.

2. How much of a monthly cash surplus does #2 leave you with? If you'd be able to pretty quickly replenish cash stores with this option, it's probably fine.

My apologies for not being complete in my original post. My EF is totally separate, fully funded, and not part of this scenario. As for option #2, what I don't want is to be house poor. I can reasonably cover all monthly payments, but wanted to optimize my selection. I guess I would like to have a dedicated fund to support the house.
HomeStretch
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Re: Help with Home purchase--How much to put down

Post by HomeStretch »

The payback on paying points to buy down your interest rate may or may not make sense. You need to calculate it based on your lender’s actual terms/rates. If the payback is 2 years or less, it’s a no brainer (assuming you will live in house for 2+ years). You need to evaluate a longer payback period to see if it makes sense..

Two situations to avoid paying points for a rate buy down:
1. If you think mortgage rates will drop further and you will have an opportunity to refinance at a lower rate in future.
2. If you will not own the home for the payback period.

You don’t mention what your monthly savings rate will be after the house purchase. If you have positive cash flow each month to contribute to savings, see if you can avoid escrow of property taxes (and homeowners insurance if applicable). This should give you a few months of higher positive cash flow that can be used for any unforeseen home repairs/maintenance before your first property tax payment comes due.

In your option 1, I don’t see the $65k as “wasted”. You can put a portion as a short-term house fund for repairs/maintenance into a savings account/money market fund and invest the rest in a Taxable account according to your asset allocation.
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cresive
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Re: Help with Home purchase--How much to put down

Post by cresive »

IMhooked wrote: Thu Dec 19, 2019 9:33 am Congratulations on saving up a nice chunk for a home! This is a great position to be in!

Clarity on how much this house (liability/expense) plays into your current monthly cash flow (income/budget) may make things more clear. What is your current annual income?

When considering purchases (house, car, new cell phone, etc.) I always found it helpful to take a look at the bigger financial picture.

For example, if I purchase the house at X and I now have a new monthly budget expense line item, how does that affect everything else (investment strategy, other debt pay downs if any--hopefully not, and life decisions coming down the pike).

It sounds like you prefer to put 20% down, have the payments as low as possible (by buying points) thus leaving you with "extra" cash. How will you delegate or earmark the "extra" cash? How do you wish the extra cash to serve you and your goals? (Putting it in a separate savings account for house related expenses that are foreseen and/or unforeseen, Putting it as extra principle on the mortgage quarterly, annually or when the designated account reaches a certain amount, Putting it towards your investment strategy, etc. etc.)

Wishing your well on pursuing your educated decision! You're in good hands here!
Again, GREAT questions and I apologize for not being more complete in my original post. Separate from this house, I am maximizing my retirement savings, have a decent (6 mo) EF and can cover every home payment listed in my scenario. what I don't want is to miss out on life due to saving for retirement and covering home mortgages. For this reason, I would like to lower my monthly mortgage. However, I do like having some savings dedicated to the house for HVAC replacement, new refrigerator, etc. I am trying to optimize my choice to give me the best of both worlds.

Thanks for your help.
Ben
Admiral
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Re: Help with Home purchase--How much to put down

Post by Admiral »

At a MINIMUM put down 20% to avoid PMI, unless for some reason the lender would not require it at a lower downpayment.

Post the interest rate and term, and the P+I only, please.

Please post the percentage of your TAKE HOME pay (that is, after taxes and savings are subtracted out) that this mortgage will represent.

Buying this house should not affect your ability to save for retirement (in your case, to max out accounts, which I hope you are doing if you're buying a 650k house). If you CANNOT max out pre-tax as still have enough cash flow with 20% down, that tells me the home is too expensive.

But the loan details would be helpful.

I have bought down the interest rate by paying points. It can work, you just need to run the numbers with the interest savings vs the cost, based on how long you will be in the house. My broker used to show me three numbers: the interest rate, the interest rate -.25%, and the interest rate -.5%, and the price of each. I then ran the numbers. Be wary of "no closing cost" loans, as often these carry higher interest rates.

Here's a decent calculator:

https://www.bankrate.com/calculators/mo ... lator.aspx
chevca
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Re: Help with Home purchase--How much to put down

Post by chevca »

Put down $175k and call it good. That leaves you with $25k for any 'after' move in expenses. Those always end up being more than you think, in my experience at least.

I'm not a fan of buying points. If you know for certain you will stay in the house for the full term of the mortgage and will never pay ahead on the mortgage, it makes sense to pay points. Otherwise, it's tough to break even, IMO.
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JoeRetire
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Re: Help with Home purchase--How much to put down

Post by JoeRetire »

cresive wrote: Thu Dec 19, 2019 8:56 amI have about $200,000 to put down on a $650,000 home. I can put it all into the house, or save some for updates and any issues I have after I move in. Taking the latter approach, I now want to decide what is best to do. I can afford the payments in every scenario, however, my preference is to buy down my payments to leave extra cash each month.

Scenarios:

1. I can put down 20% and pay approx. $3,254/month in mortgage, taxes, etc. This would leave me with about $65,000 which is a lot of wasted money.
This.

After you have used some of this "wasted" money on your planned improvements, issues, furniture, etc., invest the remainder according to your asset allocation plan.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
daheld
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Re: Help with Home purchase--How much to put down

Post by daheld »

cresive wrote: Thu Dec 19, 2019 9:49 am
daheld wrote: Thu Dec 19, 2019 9:29 am I've never bought points and don't even fully understand how that works. I think the important question here are:

1. How much of a true emergency fund does #2 leave you with? If you've got a healthy amount of cash left over in an emergency fund, this is fine.

2. How much of a monthly cash surplus does #2 leave you with? If you'd be able to pretty quickly replenish cash stores with this option, it's probably fine.

My apologies for not being complete in my original post. My EF is totally separate, fully funded, and not part of this scenario. As for option #2, what I don't want is to be house poor. I can reasonably cover all monthly payments, but wanted to optimize my selection. I guess I would like to have a dedicated fund to support the house.
You don't need a separate emergency fund for your house. I agree with others than in order to be truly helpful, people here are going to need to have an idea of your income and assets. If you're buying a $650,000 house, I assume you make well over $100k. If you have a six month emergency fund, there shouldn't be any issue just paying all at once for something like a HVAC system, then replenishing the EF over the course of a few months. That's what the EF is for, not just for the possibility of being unemployed.

I would certainly not put down less than 20%. Also, this is why it's important to pay for a good home inspector to do a thorough inspection of all major systems. Do not forget sewer lateral. This can be an expensive fix if there's an issue, and almost uniformly sellers will pay for it before the sale of a home because basically zero buyers are willing to buy a home with something that major they know will eventually cause a problem.
HomeStretch
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Re: Help with Home purchase--How much to put down

Post by HomeStretch »

cresive wrote: Thu Dec 19, 2019 9:52 am Separate from this house, I am maximizing my retirement savings, have a decent (6 mo) EF and can cover every home payment listed in my scenario. what I don't want is to miss out on life due to saving for retirement and covering home mortgages. For this reason, I would like to lower my monthly mortgage.
A home is an expensive purchase and there are a lot of costs associated with one. This may be obvious but the best way to not be “house poor” is to not overspend on the house purchase. Your house purchase price of $650k should be no more than 2-3x your annual income. As your salary rises in the future, your fixed rate mortgage payments becomes less of a % of your salary and your “breathing room” increases.

Best of luck with your home purchase!
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Re: Help with Home purchase--How much to put down

Post by Admiral »

chevca wrote: Thu Dec 19, 2019 9:56 am Put down $175k and call it good. That leaves you with $25k for any 'after' move in expenses. Those always end up being more than you think, in my experience at least.

I'm not a fan of buying points. If you know for certain you will stay in the house for the full term of the mortgage and will never pay ahead on the mortgage, it makes sense to pay points. Otherwise, it's tough to break even, IMO.
It's not necessary to stay in the home for the complete mortgage term for it to make sense financially. The payback is dependent on the cost of the points and the interest savings. For example, I bought down my loan rate from 2.75% to 2.25% (15 year loan) for (as I recall) around $6k. The payback period was 6.3 years out of 15.
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marti038
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Re: Help with Home purchase--How much to put down

Post by marti038 »

15 years ago, I'd tell you to put as much down as you could afford. Now, after a few of life's storms and knowing that interest rates are as slow as they are, I'd say put 20% down, skip the points, and invest the cash if you already have an emergency fund.

Liquidity has become more and more valuable to me the older I get. I don't know if it's because my family is growing or I've been through some bumps in the road, but I like having larger margins for error/misfortune in my life.
chevca
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Re: Help with Home purchase--How much to put down

Post by chevca »

Admiral wrote: Thu Dec 19, 2019 10:03 am
chevca wrote: Thu Dec 19, 2019 9:56 am Put down $175k and call it good. That leaves you with $25k for any 'after' move in expenses. Those always end up being more than you think, in my experience at least.

I'm not a fan of buying points. If you know for certain you will stay in the house for the full term of the mortgage and will never pay ahead on the mortgage, it makes sense to pay points. Otherwise, it's tough to break even, IMO.
It's not necessary to stay in the home for the complete mortgage term for it to make sense financially. The payback is dependent on the cost of the points and the interest savings. For example, I bought down my loan rate from 2.75% to 2.25% (15 year loan) for (as I recall) around $6k. The payback period was 6.3 years out of 15.
I didn't mean it as a hard rule or anything. Just more of a way of thinking. I'd bet most folks would not make it to your 6.3 year break even point before moving or refinancing. Just my take on it. I'm in no way saying no one should ever buy points. As with so many things finance wise, it's situational.
dsmil
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Re: Help with Home purchase--How much to put down

Post by dsmil »

I would either do #1, or something between #1 and #2. I don't like the idea of buying points and would rather put the extra money towards the down payment, instead of a fee to the mortgage company. The payoff on paying points takes some time and you may be able to refinance before then anyway. The $65k can be invested safely and may give you some piece of mind, rather than throwing it all at the mortgage, but that's up to you. I would make sure that if you put 20% down and are left with a $520k loan, that you won't be paying a jumbo mortgage rate. If so, definitely put enough down to avoid that. I believe that a $520k mortgage puts you in the jumbo range in most parts of the country.
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Re: Help with Home purchase--How much to put down

Post by czeckers »

I would put down enough to not have a jumbo mortgage. For 2019, that would be cost of house - $484,350. No sense in paying extra interest.
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cresive
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Re: Help with Home purchase--How much to put down

Post by cresive »

czeckers wrote: Thu Dec 19, 2019 11:27 am I would put down enough to not have a jumbo mortgage. For 2019, that would be cost of house - $484,350. No sense in paying extra interest.
thanks for the tip. I hadn't heard of Jumbo Loans before, but now I know what they are.
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czeckers
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Re: Help with Home purchase--How much to put down

Post by czeckers »

For 2020 the limit for a conforming loan will be $510,400.
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