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How Much Should I Put Down?

Guest Article
by Diane St. James

Want to buy a house but don't know how much to put down and how much to mortgage? This usually isn't a problem for most of us who are wondering if we will have enough to even cover closing costs. You might have enough if you can get Aunt Bea to give you a gift for the down payment, or better yet, your parents if they can't wait to finally stop tripping over your sneakers in the living room!

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For those who ask me how much they should put down when they do actually have an option, I say as little as possible. "What?", they say. Yes, I suggest even borrowing 100% if possible. I only suggest this if you plan on staying in the home for a while so that when it comes time to sell, you don't have to owe money at the settlement table.

You can still avoid PMI financing by getting a first mortgage for 80% of the sales price, and a second mortgage for the remaining 20%. The rate on the second mortgage will undoubtedly be higher than the first mortgage and the term won't be 30 years, but you do avoid the PMI. You can't have your cake and eat it too.

Here are 3 things to consider when financing your new home:

Potential Investment Earnings

If you can keep the money you would otherwise use as a down payment, in mutual funds or other investments that yield an average rate of return higher than that you are paying on your mortgages, you are coming out ahead.

Editor's Note: Investment and mortgage interest rates are always changing, for better or worse!

For example, in 2001, long term mutual funds could have a rate of return of 10-15% or more, over a 10 year span. If you were paying a combined average of 7.50% on your mortgages, you were still coming out ahead by approximately 2.50% or more. This can really add up over time. You have to think long term though, not short term as we all know how practically every fund value went way down within the last year. I am not a financial planner, but you can contact one or check out mutual funds yourself to see what investments may be best for you.

Tax Advantages

We are always looking for ways to pay Uncle Sam less and keep more in our pockets aren't we? When you have mortgage interest on a first and second mortgage you can use all the mortgage interest, up to 100% of the value of the home, in your Itemized Deductions on Schedule A of the Federal Tax Return. There is a limitation on the second mortgage interest. It is deductible up to a mortgage of $100,000. (Most of us don't have to worry about this maximum though.)

Other Expenses

When you borrow 100% of the sales price of a home, it frees up any money you do have left to be used for other things. After all, when you buy a home there are lots of other expenses. You may not be able to just stick the money you didn't use for a down payment into a mutual funds because you may want new furniture or just need furniture period. (Maybe it is time to move up from the milk crates and assembled cardboard dressers.) It is much better to use this money for major purchases than to rack up more debt buying things using your credit cards.

Of course you still need to qualify for the home you want to buy and there is a chance you may need a down payment in order to do so!

Another thing to keep in mind is the overall mortgage payments will be higher when you borrow the whole amount. Make sure you won't feel strapped or you may end up using that money you didn't use as a down payment to make mortgage payments.

There are always those who feel more comfortable putting 10% or 20% down for the security of knowing they have some equity in their home. I'd rather see a nice pot of money worth perhaps 10%-15% more at the end of 7-10 years. And by that time there will be some equity built up from just having home values increase over the years. Hey maybe, I can have my cake and eat it too!

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Copyright © 2001 by Diane St. James. All rights reserved.

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