Board 8 > Financial question for homeowners

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How much money did you put down and how did you weigh that amount versus investing those funds instead?

For example, lets say you want a $400,000 house. Lets also say you have up to $200,000 to put down. How much of that $200,000 do you put down?

I imagine important variables include what your interest rate is along with your ROI in your investments. Using the standard 2024 figures, lets say your interest rate is 6.25% and your ROI is 15%.

What kind of investment is reliably returning 15%? I would invest every penny in it and not buy a house.

If you're just looking to maximize that 200k... with your stated interest and ROI, I would think "as little as possible towards the house".

If you have other factors in play, that's a different question.

Haha, well sometimes you might need a house like if youre starting a family. And to answer your question, it was more of a hypothetical. The S&P500 averages around 10%, for what its worth.

20% to avoid PMI. When the interest rates were really low you could possibly gain an advantage by putting less down and paying PMI, but it's a tricky calculation that involves risk over the next few years.

I bought mine at 3% but put down 20% anyway to keep things simple, and sellers were barely even glancing at mortgage-based offers, let alone ones with 5-10% down. Our only option was 20% pretty much.

Also question whether your ROI is really 15% on the 30-year scale of a mortgage. It's not.

Im not familiar with PMI, can you explain?

Sunroof posted...

Haha, well sometimes you might need a house like if youre starting a family. And to answer your question, it was more of a hypothetical. The S&P500 averages around 10%, for what its worth.

You can rent a house instead if you invest the money. Whether that's the right move or not depends on a bunch of other factors.

How much is property tax/insurance? Do you have an HOA fee? What's your expected appreciation on the house (net of upkeep)? What is the cost to rent a similar house? How long do you expect to live in the house?

NY Times has a nifty calculator that takes all those things and more into consideration.

https://www.nytimes.com/interactive/2024/upshot/buy-rent-calculator.html

Very good points. So much goes into this if you are aware of all the different variables. I feel like most people just buy a house and put down as much as they can afford.

Sunroof posted...

Im not familiar with PMI, can you explain?

Yes

PMI is private mortgage insurance. Basically, it's a fee you pay each month until you have 20% equity because you're considered a risk. Now someone else give a more correct answer.

The thing about buying a home is, you're also on the hook for all the maintenance and upkeep. Not that it's not built into your rent to a certain extent, but it's nice when the dishwasher breaks to just call maintenance and they take care of it "for free". Never mind if it's something super expensive like a roof or HVAC system.

For me, in a HCOL area, renting kind of just continues to make financial sense even considering annual rent increases. I definitely can't afford a house and I can't really afford a townhouse unless I want to move to a shitty area or go way out into the exurbs. I could get a condo but the condo fees really skew affordability, plus you won't get the market appreciation of a house/townhouse, plus you'd hear your neighbors all the time.

And so I take all that excess money and invest it. And when I'm ready to retire in 15-20 years I'll have a nice big liquid nest egg to do with what I want.

I paid cash because I didn't have a credit rating and nobody would issue me a loan. If I could have, I would have definitely taken on the mortgage instead because interest rates were so stupidly low at the time. Fortunately I had the money from selling off my parents' house, but that was (the better part of) 200k that could have been in invested instead.

TBH, until my parents bought it, I had always seen myself as a lifelong renter, and it was really only cleaning out their place and going through the process once (as a seller) that even put the idea on my radar at all.

Seanchan posted...

The thing about buying a home is, you're also on the hook for all the maintenance and upkeep. Not that it's not built into your rent to a certain extent, but it's nice when the dishwasher breaks to just call maintenance and they take care of it "for free". Never mind if it's something super expensive like a roof or HVAC system.

Not that I didn't know this intellectually, but I'm always amazed at the expenses involved with owning a home sometimes. Insurance and property tax alone could pay for rental on a very poor apartment. And then there's inevitably been some project or expense each year. (Most recent was the roof. Before that, I needed work in the basement to floodproof it.)

azuarc posted...

Not that I didn't know this intellectually, but I'm always amazed at the expenses involved with owning a home sometimes. Insurance and property tax alone could pay for rental on a very poor apartment. And then there's inevitably been some project or expense each year. (Most recent was the roof. Before that, I needed work in the basement to floodproof it.)

Aside from the money, there's also the time investment. Researching reputable companies or how to do things yourself. Lawn maintenance, cleaning gutters, replacing filters, shoveling snow, etc. I don't have to do any of that shit.

The S&P averages 10% unless you invest at the height of a bull market and panic sell when it dips.

Just get the house.

We did 20%

If you buy enough bonds you can arrange the papers into a little pyramid and live in it

Dont buy a house for the "investment". You buy the house because being a homeowner is better than renting in every way unless you are a college aged kid without a real job yet. Even if you put down 0% or 3% and pay a small amount of PMI, you are still gaining all the benefits of home ownership.

SammyLiimex posted...

Dont buy a house for the "investment". You buy the house because being a homeowner is better than renting in every way unless you are a college aged kid without a real job yet. Even if you put down 0% or 3% and pay a small amount of PMI, you are still gaining all the benefits of home ownership.

I agree with a house not being an "investment" but the rest of this is a bit invective. Renting gives you flexibility, for one very important thing.

There's also the fact that the numbers sometimes just don't make sense to own. Compare Renting for $2500/month with 5% yearly increases vs Owning a $600k condo with $800/month in HOA fees. At an 8% investment rate of return, Owning is only cheaper after ~24 years. That's just the reality in a high cost of living area.

Seanchan posted...

At an 8% investment rate of return, Owning is only cheaper after ~24 years

That's buying all cash, or with a 7% mortgage at 20% down?

The gulf between rent and mortgage is the biggest factor for that, and it's large enough now on most markets that buying can be profitable in 5 years or even less.

Buying all cash sucks as an investment, but it's often the only way to get the best houses. No one who buys all cash regrets it. They are automatically in the upper echelon of society.

foolm0r0n posted...

No one who buys all cash regrets it. They are automatically in the upper echelon of society.

both before and after the purchase

Seanchan posted...

I agree with a house not being an "investment" but the rest of this is a bit invective. Renting gives you flexibility, for one very important thing.

There's also the fact that the numbers sometimes just don't make sense to own. Compare Renting for $2500/month with 5% yearly increases vs Owning a $600k condo with $800/month in HOA fees. At an 8% investment rate of return, Owning is only cheaper after ~24 years. That's just the reality in a high cost of living area.

I guess if you just make up those number and assume normal people can plop down tons of money into investments.

Renting a small, literal rat infested ghetto place here in Nashville is almost more than my Mortgage+Escrow+HOA fees on an actual townhouse, and was when I bought it. And I don't deal with a landlord trying to fuck with me constantly every month, parking, everything breaking because its a rental and the landlord does not care...

Seanchan posted...

I agree with a house not being an "investment" but the rest of this is a bit invective. Renting gives you flexibility, for one very important thing.

There's also the fact that the numbers sometimes just don't make sense to own. Compare Renting for $2500/month with 5% yearly increases vs Owning a $600k condo with $800/month in HOA fees. At an 8% investment rate of return, Owning is only cheaper after ~24 years. That's just the reality in a high cost of living area.

That's not really a fair comparison though because a $600k condo is not going to be $2500 a month in rent.

I bought my house in 2019 for $240k. My mortgage is $1500 a month. The house now is worth $400-450k. Rent in my neighborhood for the same size/value house is $3000. My HOA is $29 a month so not really a consideration

Before buying the house, I was paying $2100 a month in rent for a 2 bedroom apartment (included cable/Internet in the price but water/electric were separate). Those apartments at the time were a similar price as my house to buy (not exactly but the building next door had similar apartments for $200k plus $400-500 a month HOA)

Yeah my 450sqft apartment was the same rent pre-utilities as my current 2000 sqft mortgage. The location was in a much higher CoL area, but my current area isn't necessarily cheap either. It's just ridiculous how expensive rents are nowadays.

Shattered posted...

That's not really a fair comparison though because a $600k condo is not going to be $2500 a month in rent.

I bought my house in 2019 for $240k. My mortgage is $1500 a month. The house now is worth $400-450k. Rent in my neighborhood for the same size/value house is $3000. My HOA is $29 a month so not really a consideration

Before buying the house, I was paying $2100 a month in rent for a 2 bedroom apartment (included cable/Internet in the price but water/electric were separate). Those apartments at the time were a similar price as my house to buy (not exactly but the building next door had similar apartments for $200k plus $400-500 a month HOA)

Yeah, if you compare rentals and mortgages in similar or the same places, house sizes, quality etc; then renting will almost always be far more expensive because the landlord needs to make money. If you can actually afford to buy a home and aren't thinking of moving soon, then you absolutely buy your own place and enjoy all the rights of homeownership and the peace of mind of not dealing with awful landlords and all the issues that come with renting

foolm0r0n posted...

That's buying all cash, or with a 7% mortgage at 20% down?

20% down

The numbers I brought up were illustrative of my general situation. I'm lucky to live in an older, lower cost building in a nice, walkable area. To rent in a newer building is much more expensive for smaller units, so that makes no sense; it would also bring the rent vs own calculation lean much more towards buying.

But buying in this area is simply not possible for me. When I crunch the numbers, it always says the timeframe where it makes sense is decades (if at all) from now. Or, I move further out where costs are relatively lower and lose the benefit of location and need to drive everywhere. No thanks!

I just dislike this idea that if you rent that you're an idiot who's throwing their money away. It's a choice you make for your situation and lifestyle (financial and otherwise). I prioritized renting in a location that I otherwise couldn't afford to buy in without being "house poor" and not needing to do maintenance. And I take the difference between my rent and what a hypothetical mortgage payment would be and invest it in mutual funds.

Anyway, I've derailed this topic enough. Just wanted to give a different perspective.

Sunroof posted...

For example, lets say you want a $400,000 house. Lets also say you have up to $200,000 to put down. How much of that $200,000 do you put down?

You probably don't want to put the whole 200k down. I'd want to keep some money to pay for furniture and improvements you might want to immediately make. Plus, an emergency fund in case the boiler or HVAC blows up in the first year.

Whatever you think your ROI would be if you invested it, you should just assume it will be much less than that. You have to be prepared that if were to get much less than the expected ROI, would you still be happy with your choice.

You are being INSANELY optimistic if you think you will get 15%, and you are being too optimistic if you think it will be 10%. I see people throw this around when comparing the returns on anything "well the S&P on average does 10% per year" - yeah maybe but it also has years where its down, so depending on your time horizon, the worst case isn't just that your return is 5% instead of 10%, it's that that you are -10%, or if you go really dumbly into crypto or meme stocks or FUBO options, could be more like -95%

So this is to say, you should compare the interest on your debt to a very modest return. IMO, the good rule of thumb is that if interest is below 5%, it's probably safe to just keep making the normal payments and let it run its normal course. At 5%, now you are reaching the point that you probably aren't going to be exceeding the cost of interest that much with any investments you do. At 10%, just pay off your debt dummy. At 20% for the love of god pay off your debt.

After all - stocks are one potentially lucrative investment opportunity - but another good way to build money is with bonds or other guaranteed interest streams - and those are always going to be similar to your mortgage. So paying off your mortgage is comparable to taking one of those investments.

Also keep in mind that putting extra money into your mortgage is A LOT more valuable early on than it is later due improving the impact the your monthly payments are having over interest.

Overall... if you have a mortgage, you should make sure you have a decent emergency fund but after that, putting money into the mortgage is a nice safe good idea.

As to what I would actually do - I just bought a house this year for $240k and I put 20% ($48k) down. In Canada, you need to put 20% down or you have to get CMHC insurance on the mortgage and they capitalize the cost of that into it, so it woulda added $6k to my mortgage, so I sucked it up and pulled money out of my GICs to make it.

After doing all the moving expenses and doing initial work on the place and replacements to furniture I needed to do, I'm under my $10k emergency fund so I'm going to build that back up, then hopefully over the next couple years I'd like to put another 10-20% into the mortgage before I really go back into the market.

I also do biweekly payments. It's essentially the same impact on me as monthly payments but the extra payments it makes each year by default help speed up the mortgage from a 25 year amortization to around 22 year. It's the same impact as just making extra payments but its nice to have that going without thinking about it.

CoolCly posted...

I also do biweekly payments. It's essentially the same impact on me as monthly payments but the extra payments it makes each year by default help speed up the mortgage from a 25 year amortization to around 22 year. It's the same impact as just making extra payments but its nice to have that going without thinking about it.

holy crap

Biweekly payments actually mean you make 1 extra monthly payment a year. 26 half-months is 13 months instead of 12 months.

25*12-22*13=14 okay so it only saves you 14 months!! math

I am always of the opinion that its better to work toward being debt free, rather than trying to leverage investments and debt. That financial philosophy has worked wonders for me anyway. My mortgage is all paid off, and being debt free actually gave me the opportunity to take a year off of work recently. Had I gone down a different path, maybe I'd have a little more money overall, but I'd still be paying off my mortgage and the one-year sabbatical would've been out of the question.

If the 200k represents your life savings, then you shouldn't put it all towards the house. Put enough down to avoid PMI, save an emergency fund and a home improvement fund (and really try to build that into your monthly finances).

If it represents only your house savings, I'd play with a mortgage calculator and a compounding interest calculator.

And yes for a home, you ideally want to avoid PMI, you need to think about repairs and improvement projects and tools/contractors, property taxes, and homeowner's insurance.

guffguy89 posted...

I am always of the opinion that its better to work toward being debt free, rather than trying to leverage investments and debt. That financial philosophy has worked wonders for me anyway.

It's always worked for me, because I grew up poor. But now that I am definitely not poor, I find it irresponsible to ignore all the mechanisms that rich people use to get and stay rich. Obviously I'm not trading options and such, but holding a mortgage at under 5% rate is not exactly daredevil behavior. When I get richer, then leveraging debt will be equally "safe" as what I'm doing now, and so I will try it.

catesdb posted...

25*12-22*13=14 okay so it only saves you 14 months!! math

That isn't how the math works - because it tilts the balance of principal vs interest in your regular payments. Early in the mortgage, more of your payment goes towards the interest on your mortgage rather than the principal. As the principal gets lower over the life of your mortgage, the interest becomes portion of your payment is smaller so more of your payment goes towards the principal. This is what keeps your mortgage payments smooth over the entire life of your mortgage. If you make extra payments on your mortgage, or if you do biweekly payments which results in extra payments, then you'll wear down the principal faster to get through the high interest period faster

I *REALLY* dislike the period of the loan where my payments are getting eaten up by interest. I would rather get through that portion faster than earn a bit more in investments. By reducing the interest portion early, we can increase the effect our payments are having on the principal.

Here is the math on the two scenarios in my mortgage - the bold are sums of the activities over the life of the loan. In the Monthly scenario, my 25 year mortgage ends at the end of 2049 as expected, but the biweekly payment (half of the monthly payment exactly, which is called an accelerated mortgage, rather than being adjusted to last 25 years) ends in early 2046 - a few years sooner. More than 14 months. You can see in May 2026 that the principal is a couple thousand less at $185k vs $183k - doesn't seem like much but snowballs over time.

The total interest over the life of the loan is $144k vs $120k - so I'm saving $24k over the life of the loan - and for really no impact on my life at all - and that's just from the biweekly option, which doesn't really put that much pressure at all! Making extra payments would accelerate this faster

Meanwhile - making extra payments near the *end* of the mortgage has barely any impact at all you might pay it off sooner

https://gamefaqs.gamespot.com/a/forum/a/a0105f13.jpg

https://gamefaqs.gamespot.com/a/forum/f/fead0caf.jpg
https://gamefaqs.gamespot.com/a/forum/6/64ec4d41.jpg

So in your situation OP described - I actually don't think its necessarily a question of how much of the $200k you'd put down - I think it's a question of how long you want your amortization period to be and what you want your payments to be. I'd be putting down at least $100k no matter what, but maybe not directly down initially. No matter how much you put as a down payment, the remainder of your purchase price will then be amortized out into a 25 year mortgage, resulting in the early period where your payments are mostly interest. You could push for a 10 or 15 year mortgage if you want to get high payments that outweigh the interest, for sure, but you'd have to be approved for it and then you'd have much higher mandatory payments each moth, which I don't like the flexibility of

What you *could* do is a lower payment down - 10 or 20% or whatever you want, then you end up with a 25 year mortgage for the remaining amount. Then, if you make sure your mortgage allows extra payments (often you have an amount you can pay extra per year, like 10 or 20%, but you HAVE to make sure thats written into the terms), make those extra payments and keep the regular mortgage payments the same as they already were. Then you'll be passed the initial high interest hump and just let the mortgage ride out until it gets paid off eventually.

That's how I look at debt, anyways.

Neon is definitely right that you should have an emergency fund and a home improvement fund baseline before dumping more into your mortgage

If you put $100k or $200k down, then you will end up with a 25 year mortgage. The thing I really dislike the most about mortgages is that early period where you have

I thought cates was just fooling around with that post fwiw

CoolCly posted...

You can see in May 2026 that the principal is a couple thousand less at $185k vs $183k - doesn't seem like much but snowballs over time.

Because you're literally paying 13 monthly payments a year, so an extra $1100 a year which is $2200 by 2026.

How does it not seem like much? It's an extra $100 a month. In my case the same technique would be $200 extra. You can buy a lot of stuff with that. The point of a mortgage is to have a low monthly payment so you can live your life better.

I do agree with you that money is not exactly equal at all times. $100 that's mostly interest is different than $100 that's mostly principal. But your conclusion is backwards - the high interest money is actually the most valuable because it reduces your costs TODAY. When you're 55, that extra $100 won't mean anything. You won't actually care whether you pay your house off by 2046 or 2049. So it's illogical to sacrifice your current life for that future person who doesn't care.

(That said, I invest my money heavily in other things, so I'm still sacrificing for the future, but with riskier investments that can have more tangible rewards)

CoolCly posted...

Then, if you make sure your mortgage allows extra payments (often you have an amount you can pay extra per year, like 10 or 20%, but you HAVE to make sure thats written into the terms),

This. I made sure our mortgage allows me to pay any amount extra and have it applied directly to the principal.

Maniac64 posted...

This. I made sure our mortgage allows me to pay any amount extra and have it applied directly to the principal.

This is standard boilerplate in the US.

foolm0r0n posted...

Because you're literally paying 13 monthly payments a year, so an extra $1100 a year which is $2200 by 2026.

How does it not seem like much? It's an extra $100 a month. In my case the same technique would be $200 extra. You can buy a lot of stuff with that. The point of a mortgage is to have a low monthly payment so you can live your life better.

??? I'm not saying it isn't much - I'm literally saying it may not seem like much but it IS much. I am saying it's significant - somebody looking at it they may not think $185k vs 183k is much of a difference, but the entire point of my amortization schedules show that it is a big difference....

I am also not comparing it to spending money to improve your current life. I am comparing it to doing other savings options - and I think it's worthwhile to get over the interest hump so that your monthly payments are all converting to equity instead of disappearing to interest faster. It sucks to make mortgage payments for 5 years and the equity in your home has barely increased.

You can decide how much you should allocate towards current lifestyle vs longterm savings yourself. Personally, I left the paycheck to paycheck lifestyle a long time ago, so $200 literally does not have a big impact on my personal current life. If you can't afford to do it, then you can't afford to do it - you are correct that the entire benefit of the mortgage is to spread this cost over 25 years, so there's no need to light your life on fire to try to get payments in early. My attitude is that when you have a surplus that you might invest or whatever, making extra payments on a mortgage early is very valuable

For what its worth, I think fairly guaranteed $24k savings in interest will be a nice when I'm 55 (keep in mind, you can spreadsheet out that investing in ETFs might return you more - but it is not guaranteed) and it will be also be nice to have the mortgage end a little early when I'm considering what age to retire. Personally, I live in a large extended family of financial irresponsible people who are all reaching retirement age with little to no savings, and the ones who do have mortgages still aren't close to finishing it out, and they have no idea how they are going to pay for it when they retire... but still think they are going to retire soon. The benefits I'm talking about seem pretty tangible to me.

chiming in to affirm that if you aren't paying extra on your mortgage you are objectively doing it wrong

Depends on your interest rate and what else you are doing with the money I guess?

I've had this debate with the wife though. I would prefer to make extra payments but she would rather not because we are sub 3% interest and she doesn't think we will own the house in the backend years where it makes a difference. I've tried logic-ing that it reduces interest paid each payment going forward and that extra payments do more the earlier into the mortgage you make them but she would rather have the funds available for other stuff

FFDragon posted...

chiming in to affirm that if you aren't paying extra on your mortgage you are objectively doing it wrong

Agreed.

FFDragon posted...

chiming in to affirm that if you aren't paying extra on your mortgage you are objectively doing it wrong

How?

CoolCly posted...

??? I'm not saying it isn't much - I'm literally saying it may not seem like much but it IS much

I just don't know who would agree that $100/mo doesn't seem like much.

FFDragon posted...

chiming in to affirm that if you aren't paying extra on your mortgage you are objectively doing it wrong

It's not objective. Different people have different priorities.

It's 100% subjective.

Edit: personal finance is one of the most subjective topics in the world

foolm0r0n posted...

I just don't know who would agree that $100/mo doesn't seem like much.

I don't think $100 a month is much. Inflation has been such a bitch that $100 really doesn't go far nowadays.

If I could actually convince my wife to do extra payments, I'd be throwing down an extra $300-500 a month probably to make it worthwhile.

Your wife is smart