When you buy a house don't pass on the downpayment
A while back I had a conversation with a friend. This friend told me the calculations of putting 20% down versus not putting the 20% down towards a new house revealed that the monthly payment would not go down by much.
I thought about it and did my own calculations. Let's take as an example a calculation with the following characteristics.
Price: $100,000
Down Payment: 0%
Term: 30 Years
Interest Rate: 6%
Payment: $599.55
If instead you put the 20% down, you end up with a payment of 479.64. That doesn't seem like much. So let's say that instead you went with a 15 year fixed mortgage. Your payment would now be $632. That's assuming that your interest rate went down to 5% because you took a 15 year mortage instead.
Ok, so you still end up paying a bigger payment with a 15 year mortgage. That's true, but that's only $32 more dollars for 15 years instead of $599 for 15 years (only counting first 15 years of both mortgages). The former is equal to $5,760. The latter is equal to $108,000. In essence, that $20k that you chose not to come up with has cost you $108k. That's a hefty price to still not be an actual "owner".
I am intentionally avoiding the topic of investing your money vs. using it as a down payment because that topic deserves its own argument.
If throwing away $108k doesn't bother you, consider this: It is going to take you approximately 12 years to get your principal down to $80k (with the 30 year scenario). Don't even get me started about the PMI implications. If instead you would've paid the 20% down you would only be three more years from owning your home outright. Instead you are full 18 years away from actually owning the home.
In case you are confused why I am even advocating putting money down, I will give you my source of phylosophical inspiration: Dave Ramsey
If you are interested in calculating the ammortization values yourself, here is a calculator.
I am interested in hearing anyone else's thoughts on this issue.
I thought about it and did my own calculations. Let's take as an example a calculation with the following characteristics.
Price: $100,000
Down Payment: 0%
Term: 30 Years
Interest Rate: 6%
Payment: $599.55
If instead you put the 20% down, you end up with a payment of 479.64. That doesn't seem like much. So let's say that instead you went with a 15 year fixed mortgage. Your payment would now be $632. That's assuming that your interest rate went down to 5% because you took a 15 year mortage instead.
Ok, so you still end up paying a bigger payment with a 15 year mortgage. That's true, but that's only $32 more dollars for 15 years instead of $599 for 15 years (only counting first 15 years of both mortgages). The former is equal to $5,760. The latter is equal to $108,000. In essence, that $20k that you chose not to come up with has cost you $108k. That's a hefty price to still not be an actual "owner".
I am intentionally avoiding the topic of investing your money vs. using it as a down payment because that topic deserves its own argument.
If throwing away $108k doesn't bother you, consider this: It is going to take you approximately 12 years to get your principal down to $80k (with the 30 year scenario). Don't even get me started about the PMI implications. If instead you would've paid the 20% down you would only be three more years from owning your home outright. Instead you are full 18 years away from actually owning the home.
In case you are confused why I am even advocating putting money down, I will give you my source of phylosophical inspiration: Dave Ramsey
If you are interested in calculating the ammortization values yourself, here is a calculator.
I am interested in hearing anyone else's thoughts on this issue.
Comments
Using a similar analogy, let me give you an example:
(True story) A woman wanted to buy a house and she put 20% down; roughly $40,000 dollars. Mind you, she went with the 15 year mortgage and paid the extra $150.00 plus dollars to get to the 15 year mortgage instead of the 30 year mortgage. The woman lost her job and was unable to pay her monthly mortgage payment. Needless to say, she went into foreclosure.
The point is, there are varying factors behind every situation. Not everyone follows the Dave Ramsey plan to the t.
At face value, your assessment about moving from a 30 year to a 15 year mortgage does make perfect sense in a "stable" economy while adhering to the Dave Ramsey plan. But, with Americans being apprehensive about job-loss and the like, short-term solutions seem feasible to them.
If the woman would've went with the 30 year mortgage,paid the extra $150.00 plus dollars, and put away her $40,000 dollars for a rainy day, she may have been able to find employment before foreclosure and live off the 20% she would've paid as a down payment on her home.
In all, it's all perspective. Certainly, you would come out ahead by the logic you wrote about. But in today's shaky economy, not putting 20% down is a risk some would be willing to take.
I think the one of the reasons why the economy is so bad to begin with is because we as Americans have been using the philosophy of "Buy now pay later". We are no longer in the mentality of saving for what we want.
After all, credit is so easy to get. We have been living in a microwave era - we want it and we want it now. That's why the rich get richer... They pay with cash. If the only thing you have is a house payment that meets the DR criteria and you have 3 to 6 months emergency fund, you would be able to survive most bad economies.