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Should I Make A Larger Down Payment If I Can? What’s The Impact?

27 Aug 2020

The determination of how much money to put into real estate affects a lot of other financial areas – this decision should be looked at from an investment perspective. All investments consider – Liquidity, Safety, and Rate of Return. This data should also reflect any decision you make on a mortgage down payment. In this case, we are talking about:

  • Monthly payments and cash flow
  • Liquidity – One of the best protection strategies for people is having cash
  • Long term interest costs
  • Impact on your net worth

How Much Down Payment for a Mortgage?

In this example, we are comparing an $800,000 purchase price, putting 25% down with a $600,000 mortgage. An interest rate of 3.75% with total payments of (principal, interest, taxes, insurance) of $3,788, and a $200,000 down payment. We will compare that to a 10% down, a mortgage of $720,000, and a slightly higher interest rate. Now the payments are $4,600 with all in – 10% down. An $80,000 investment into the property and a $812 a month in difference in required cash flow on the home.

Over a 30-year period, with the 25% down payment and $600,000 in borrowing, you would have made over $1.30M in payments of which $415,712 was interest cost. The home value has risen to $1.5 million, assuming a 2% appreciation rate.

On the 10% down – we have $720,000 borrowing and an extra $120,000 in cash which we left invested elsewhere, and that money earns 5% over time. The mortgage insurance (that was required with the 10% down and has a payment of $144) – will drop off in five years and will be added back into your investment plan. You have higher total payments of $1.77m of which $536,212 was interest and the same 1.5M home value.

Mortgage Down Payment Over Time

What does this look like over long periods of time? Your total payments included the initial $120,000 and the MI payment going into savings. The investment account has grown to $620,000 over 30 years. You put $80,000 into the home instead of $200,000 AND you are ahead by $324,000 if you stayed committed to the plan. Now that plan requires discipline because you had to invest $120,000 and $144 a month when the mortgage insurance fell off. The amazing thing is you are debt-free in 19 years and seven months.

Now someone could argue “Well, great, so if I didn’t ever put that money in, my payment would have been lower…” – you will remember we had a payment difference here of $812 a month – “and so what if I upfront knew I was going to do that and I simply took that $812 and I put that money in an investment account at the very beginning of when I started this plan?” The first question would be, “Does anyone actually do that”? If you put that down payment in, would you also actively save the difference in cash flow? Most people don’t do that but to keep it fair, we assume they did.

If you did that, and saved the $812 a month and earned 5%, you would have $291,000 and your mortgage would be paid off in 18 years and 11 months, so you are ahead. So that strategy would work putting the larger down payment and saving the cash flow on the side. The big consideration is do people actually do that.

Going back to liquidity, safety, and rate of return. We have to consider:

  • Discipline – To invest money, put it to the side, keep it for emergencies
  • Liquidity – This is really important. If you close and you put all your money into the property at $200,000, you have no liquidity after closing. With a second option and less money down, you would have $120,000 as a starting fund. And granted, you would have a higher monthly payment, but you would have $120,000 to draw from and it protects you and your family if something were to happen, like a job loss or a health issue.
  • On another positive side, there are opportunities that come to you over time. What if another property came along or another investment and you needed the cash? Once it’s inside your real estate, you cannot get hold of it.

Consider this strategy and thinking over a long period of time. We are not talking about an individual or a single strategy or a single transaction. We are talking about the idea of money into real estate over time and cash flow over time. So neither answer is right or wrong. They are just different. And it depends on your investment philosophy and discipline.

If you want to learn more about this and other lessons, reach out for a copy of my book or view the other lessons on our YouTube Channel.

Short Lesson

Larger or Small Down Payment – What’s better?

  • It is about cash flow and net worth
  • What offers better protection
  • Which pays off sooner – you may be surprised

For all mortgage lending and HECM questions, reach us by phone, email, or schedule an in-person consultation HERE.

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