Q: The proceeds from the sale of our previous home are more than the 20 percent we were going to put down on our new home to avoid paying private mortgage insurance (PMI). Is it better to put all the proceeds down on the new loan or just the required 20 percent?
A: You’re in the fortunate position of getting to decide where your money is best spent. The 20 percent threshold is important because that’s the PMI “line in the sand.” If you put down 20 percent, you don’t have to get private mortgage insurance, which is expensive and is not deductible.
Should you put down more than that? It depends on whether you have a better place for the cash. I’d certainly leave some money in an emergency fund. You want to make sure you’re not digging around for cash when you need it most.
On the other hand, if you put down more than 20 percent, you could ask your mortgage lender for a free equity line of credit against your house. Then, if you need it, you can tap into it.
Do you have an investment in mind that’s likely to appreciate faster than the amount you’re spending on the mortgage? If you borrow an extra $50,000 at 6.5 percent, your investment will have to earn close to 10 percent to break even after taxes (assuming you do not itemize on your federal income tax return). I don’t know many investments that do that too often these days.
Take some time to consider what you cash needs might be going forward (college tuition, retirement, home improvement projects, medical needs, etc). Then, think about investment opportunities you have (either in stocks, bonds, or other real estate investments) and make a decision.
Hi Ilyce,
I am a retired commercial banker after a 41 year career. I have been involved with MANY troubled loans where my commercial customers had severe home mortgage problems. I lived through their pain with them–very ugly indeed.
I have advised my son and his new wife to shop carefully over time while they are building up savings for a down payment. They have VERY ilttle savings now and spend all they make even though they both have good management careers. With the nation’s economy in a tough spot relative to their generation, and with an important election in a year, my advice is to save for the down payment, in spite of my son’s ability to obtain a VA loan, while the national scene gets into better focus. The election’s tax and other finan+cial implications for the middle class going forward will not make their financial lives any easier.
What is your recommendation for a percentage down payment for a couple (no children) with the above general profile?