Mortgage Guys

[stomachmonkey]

Let's keep the math simple.

$475K purchase price. Assume 6% fixed rate 30 year product.

Drop $200K and finance $275k or drop $100K, bank the other $100 in a 5% account.

Delta between $100 and $200 down is $600 per month. So if the $100k in the bank does not earn any interest at all it covers 165 months, just about half, the payments.

What does it look like if the $100 k has been earning interest?

With $200 k down the finance charge is ~$320 k for a total cost of ~$600K. Add the $200 back and it's ~$800.

With $100 k down the finance charge is ~$435 k for a total cost of ~$809K. Add the $100 back and it's ~$900.

So it looks like the $100 k banked, being depleted $600 per month but earning 5% needs to end up being doubling itself to break even?

[Hugh R]

Your not factoring in the tax write off of the interest, which can significantly affect your tax bracket. Putting more money down, you may come under a jumbo loan which is a higher tax rate. I'm not a finance guy, just things to think about.

[AngM018]

side note (since I am in real-estate, but not a mortgage broker)

Can you cover the higher monthly mortgage payment?
Will you be able to be approved for the higher payment (debt to income ratio's)

[stomachmonkey]

Originally Posted by AngM018

side note (since I am in real-estate, but not a mortgage broker)

Can you cover the higher monthly mortgage payment?
Will you be able to be approved for the higher payment (debt to income ratio's)

No issues with the finances on both questions.

The idea here is to use the $100k anyway.

Put it into an interest earning account.

Pay the $1600 monthly into it then pay the $2200 from it. So you are depleting the 100k by 600 per month. Monthly out of pocket stays the same.

You earn interest on the declining balance.

[911Rob]

Go with the $100K down, invest the other $100K.

Scrap the 30 year amortization though. Go with 15, 20 MAX!

IMHO,
Cheers

[AngM018]

and the really scary part is at closing when they show you how much you actually pay for the house + interest for the 30 years. I have never seen it less than double yet!

[Hugh R]

+1 on what Rob said. I had a 30 year loan and after five years refinanced with a 15, shaved 10 years off. That's going to be about $250K in interest that I won't be paying.

[RANDY P]

Remember that the only difference between a 15 and a 30 is the amount you pay monthly.

If you aren't taking any cash out or paying off any other debt it's usually cheaper just to up the monthly payments on your existing 30 to pay off in 15 years or whatever your goal is.

No extra fees, it's free.

rjp

[Dueller]

I guess the real question is "If you had a 450K house you owed 250K on would you take out a $100K home equity loan at 5% to invest?

Same thing....and a lot of folks got burned recently.

[turbo6bar]

Originally Posted by RANDY P

Remember that the only difference between a 15 and a 30 is the amount you pay monthly.

If you aren't taking any cash out or paying off any other debt it's usually cheaper just to up the monthly payments on your existing 30 to pay off in 15 years or whatever your goal is.

Exactly. The only penalty for going with 30-yr fixed is the slightly higher rate. If you're feeling good, make payments as if it were a 15-yr mortgage. If things are tight, revert back to regular payments. It's always good to have options.

BTW, 5% would be tough to get in a risk-free investment. Thank you, Federal Reserve.

[KFC911]

Originally Posted by turbo6bar

Exactly. The only penalty for going with 30-yr fixed is the slightly higher rate. If you're feeling good, make payments as if it were a 15-yr mortgage. If things are tight, revert back to regular payments. It's always good to have options....(

That's exactly what I did on my primary residence. Got a 30-yr when my salary wasn't as much, and began by paying an additional $100 in principle each month, then increased the additional principle amount as my circumstances changed. Paid the loan off in 12 years, but always had the option of simply paying the original 30-yr amount if things got "tight"...fortunately, that didn't happen. The difference in interest rates between the 30 and 15 were insignificant in the big picture, and the flexibility gave me peace of mind.

[frogger]

Don't forget you'll also pay taxes on the invested $100k's growth. So, you have to look at the post-tax costs/benefits of each solution to make an informed choice.

[Rot 911]

I too went with the 30 year rate, but make extra principal payments to get it down to less than 15 years.

[Rick Lee]

You don't have to worry about a jumbo loan in either scenario. $100k down will still get you well under the current conforming limit and that limit will very soon go up to over $600k!!!!! Unreal. Hell, FHA is about to double their max loan amount to over $700k. The world is coming to an end. I really can't believe the stuff I've been reading about Fannie/Freddie and FHA max loan amounts.

[Steve Carlton]

You've got a relative break-even if you invest the $100K at 6%, as you'll be paying tax on that interest income and deducting the 6% interest on the extra $100K borrowed. Interest rates to be earned on savings is going down with the recent rate drops, too, so you'll be likely to be paying a spread on what you earn vs what you pay. If you had an investment that's likely to return more than 6%, then there's a utility value there, in addition to having the $100K reserves.

Right now I'm seeing about an 0.625% difference between 30 and 15 year conforming rates. If you borrow $275K at 5.375% instead of 6%, the payment would be $2,229/mo. The total interest would be $126K vs $319K. You'd have the combined factors of faster payoff and lower rate working for you. The total interest for 15 years at 6% would be $143K.

How old will you be in 15 years vs 30 years? That payment going away at that time could be really nice.

[Rick Lee]

Originally Posted by Steve Carlton

How old will you be in 15 years vs 30 years?

That's a tough one!