Wondering how much cash you should use for your down payment and how much of a loan you should apply for?
If you put down at least 20 percent, you can eliminate Private Mortgage Insurance (PMI). But, you can also keep your cash, take the largest loan possible, and take a tax deduction on your return.
Is there a rule of thumb to follow when it comes to a down payment? Over the long run, homeownership is likely to be very profitable, and at the end of the journey a homeowner pays off his mortgage and owns the house outright.
Many experts will say it’s wise to have a large mortgage because of the low rates and tax deduction, but it may not be right for everyone.
Here are some things to think about:
Private Mortgage Insurance, or PMI. PMI is a monthly fee that the borrower pays if the mortgage 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 this risk. Thanks to creative lenders, however, it is possible to put as little as no money down and avoid PMI by taking out two loans. Ask your loan officer about possible loan packages with no PMI. These are often called “piggy-back” financing.
Finding a comfortable monthly payment. This is a very important issue for anyone taking out a mortgage loan.. If you have good credit and income, most lenders will qualify you for a larger loan amount than you might feel comfortable with. Consider your personal spending and saving habits and try to estimate the maximum mortgage payment that would comfortably fit into your budget.
Taxes. It’s important to understand the benefits of mortgage interest and real estate tax deductions. Since you will own the home, you will be able to deduct all the interest and taxes that you pay on the home. Consult a tax expert for accurate advice because it’s important to get an idea of how much of a tax break you will receive as a homeowner. This too will help you decide on an appropriate mortgage amount.
Opportunity costs. Analyze the “opportunity cost” of a large down payment. As an example, let’s say you put down 20 percent, or $44,000. What are you giving up to put this much down? Is the $44,000 currently earning a good rate of return that you will lose if you withdraw it? Do you have to sell securities and then pay capital gains taxes to liquidate the money? Get an idea of how much it will cost you and see if it makes sense for you.
Other debts. Take into consideration other debts you may already have. For example, if you are carrying substantial credit card debt, it would probably be smarter to pay the cards off and put down a smaller down payment.
Hopefully this information helps point you in the right direction when deciding what mortgage balance you should carry. No matter which downpayment and loan amount you choose, congratulations on purchasing a home!