How Much Should You Put as Your Down Payment?
*Question:* I have been renting the same townhouse for the last six years.
My landlord now wants to sell the property and he has asked if I want to buy
it. He is offering to sell it to me for $220,000, which I think is a great
deal. I have a good salary, good credit and a good savings account. My
question is this: How much cash should I use as a down payment and how much
of a loan should I apply for? Some people tell me I should put at least 20
percent down to eliminate Private Mortgage Insurance (MI). Others have said
I should keep my cash and take the largest loan possible to get the tax
deduction. Is there a rule of thumb that I should follow when it comes to a
down payment?
*Question:* I have been renting the same townhouse for the last six years.
My landlord now wants to sell the property and he has asked if I want to buy
it. He is offering to sell it to me for $220,000, which I think is a great
deal. I have a good salary, good credit and a good savings account. My
question is this: How much cash should I use as a down payment and how much
of a loan should I apply for? Some people tell me I should put at least 20
percent down to eliminate Private Mortgage Insurance (MI). Others have said
I should keep my cash and take the largest loan possible to get the tax
deduction. Is there a rule of thumb that I should follow when it comes to a
down payment?
Now, let's get to your question. Although many experts will say it's wise
for income earning folks to have a large mortgage because of the low rates
and tax deduction, it's not right for everyone. Here are some things to
think about:
- *Private Mortgage Insurance (PMI).* PMI is a monthly fee tha t the
borrower pays if the first trust loan exceeds 80 percent of the purchase
price. Since a lower down payment results in a statistically higher risk to
the lender, PMI insures a portion of the loan to reduce the risk to the
lender. Thanks to creative lenders, however, a borrower can still put as
little as no money down and avoid PMI by taking out two loans. Ask your loan
officer about loan packages with no PMI, sometimes called "piggy-back"
financing.
- *Monthly payment "comfort level".* This is a very important issue.
If you have good credit and income, most lenders will qualify you for a
larger loan amount than your would want. The first thing you should do is
assess your personal spending and saving habits and try to come up with the
maximum mortgage payment that would fit into your budget.
- *Taxes.* Understand the benefits of mortgage interest and real
estate tax deduction. Since you will own the home, you will be able to
deduct all the in terest and taxes you pay on the home. Consult a tax expert
on these issues, but it's important to get an idea of how much of a tax
break you will receive if you own the home. This will help you decide your
mortgage amount.
- *Opportunity costs.* Analyze the "opportunity cost" of a large down
payment. In other words, if you put down 20 percent, or $44,000, what are
you giving up? Is the $44,000 earning a good rate of return? Do you have to
sell securities and pay capital gains taxes to liquidate the money? Get an
idea of how much it will cost you to put down $44,000.
- *Other debts.* Take into consideration other debt you may have. For
example, if you are carrying substantial credit card debt, it would probably
be better to pay the cards off instead of putting down a large down payment.
Hopefully this is a start in the right direction when determining how what
mortgage balance you should carry. But as I said, congratulations on purchas
ing a home. It's a great way to ring in the new year.
By Henry Savage
RealtyTimes |
