Any reason to ever put down more then 20% How about now?

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25w100k+_IHB

25w100k+_IHB

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So, here I am again asking the financial and RE gurus of the forum to dispense their wisdom on the issue....



There is a real possibility I might pick up a condo at the end of summer since we're finally hitting the point where its cheaper to buy then rent in some cities.



Now, I don't think i'm going to put down more then 20% for a couple reasons. One, I like having money liquid (I might want to quit my job, maybe I want to splurge on that six series ten wants me to buy, who knows) and two, I want to hedge against my purchase in case housing crashes a lot more.



I figure if I put 80k into a condo and have another 60 or so in the bank, if things fall a ton even more, I'll just pick up a bargain as an investment property with the extra cash.



Is there ever a reason to put more then 20% down for a place, (barring exceptional circumstances such as buying a multimillion dollar property)? If so, is there a reason to put more down for myself?
 
It depends on what you do with the money. Park it in a savings account making 2%? Index fund? Think of paying down more mortgage giving yourself a guaranteed percentage return (your interest rate less the tax savings on the interest you would have paid on principal had you not paid it down). If putting more than 20% down gets you a better rate, that's also a consideration. There are reasons, it just depends on your time horizons, risk/liquidity preference, etc. Someone please correct me if I'm wrong, just trying to test whether I learned anything in school :)
 
If you want to keep a big chunk of cash in the event prices fall quite a bit further, you probably shouldn't be buying anytime soon.



Keep cash if it will yield more in after-tax earnings than the after-tax interest expense you are paying... That is not likely to be the case in the short-term, but you're the only one to evaluate.
 
I see no reason to put more than 20% down because if you have good credit (assuming you get a conforming loan), your rate will be virtually the same if you were to up 30-40% down. Cash is king and it's always best to be as liquid as possible so that you have a rainy day fund in case of illness or unemployment.
 
What happens mortgage rates rises to 10 - 12%. Would you still want to put only 20% or less down, or increase the down payment?
 
[quote author="PANDA" date=1214302196]What happens mortgage rates rises to 10 - 12%. Would you still want to put only 20% or less down, or increase the down payment?</blockquote>
You can't just look at the nominal mortgage interest rate you are paying. You have to look at your tax effected rate...for example, if you the mortgage rate is 10% and your marginal tax rate (state & federal) is 30% than your effect mortgage rate is 7% (10% - 3%). Then you have to look at what kind of after-tax return that cash you would have sitting around could generate, but then again having cash laying around equals piece of mind which can be priceless. So it really comes down to a case-by-case decision.
 
[quote author="usctrojanman29" date=1214302482] Then you have to look at what kind of after-tax return that cash you would have sitting around could generate, but then again having cash laying around equals piece of mind which can be priceless. So it really comes down to a case-by-case decision.</blockquote>



I contend the entire reason the financial system is experiencing the credit crises is because of this attitude. Folks have forgotten to accurately calculate risk and are too focused on return. They do not know what "cash" actually is, and that cash and money may be similar but not equal.


And many may consider equity in real estate to add more piece of mind than cash laying around.


I think the next generation will know how to evaluate risk better than the present generation.


Question, and I do not know the answer: How many folks with a net worth of more than $5,000,000 have a mortgage on their primary residence?
 
[quote author="awgee" date=1214310637][quote author="usctrojanman29" date=1214302482] Then you have to look at what kind of after-tax return that cash you would have sitting around could generate, but then again having cash laying around equals piece of mind which can be priceless. So it really comes down to a case-by-case decision.</blockquote>



I contend the entire reason the financial system is experiencing the credit crises is because of this attitude. Folks have forgotten to accurately calculate risk and are too focused on return. They do not know what "cash" actually is, and that cash and money may be similar but not equal.


And many may consider equity in real estate to add more piece of mind than cash laying around.


I think the next generation will know how to evaluate risk better than the present generation.


Question, and I do not know the answer: How many folks with a net worth of more than $5,000,000 have a mortgage on their primary residence?</blockquote>
Those people that consider equity in real estate to add more piece of mind than cash are living in a dream, that equity can disappear quicker than a piece of ice can melt on hot asphalt. Last I checked, cash is a lot more liquid than unrealized equity in real estate. I too agree, and hope, that the next generation is better able to evaluate risk and make more informed buying decisions by looking at a large purchases such as homes with an objective analysis and dial back on the emotion and herd mentality.
 
Any "cash" return is presently negative after accounting for currency devaluation, (price inflation). I guess some people would gain peace of mind from a guaranteed loss in asset value. Not me.


Equity in a home is a place you can live in and the more equity one builds, the less chance that it can be lost. Once you actually own your home with no mortgage, chances become remote that you can lose it. For some folks, myself included, this would be more condusive to peace of mind.


But, what do I know? Most people think I am a financial whacko, like when we sold our home in the summer of 05 and decided to lease.
 
You could always put the 20% down now, and then pay down the loan at some later date with the cash you saved. I know that doesn't help the monthly payment, but it sounds like cashflow isn't the issue.
 
For my RE protfolio, I use as little as I possibly can. For me, cash is a very difficult to acquire. For my purposes, it can be used for ALOT of things. Equity? Well it has to be processed and many times it comes attached with a fees, fines, dues, etc. etc. etc.



Also for me, I did alot of 1031 like kind exchange funds, so NOT using ALL of it came with very heavy penalities.

As everyone here mentioned, it just depends upon your personal situtation.



For my situtation, I could go one of two ways.

1. Pay off entire amount and use the other half to pay for taxes, insurance, etc. etc.

2. Pay minimum amount and use the majority of the money to pay for mortgage, taxes, insurance, etc. etc.



I could go either way, I need to talk to my tax accountant before I do anything though.



good luck

-bix
 
Awgee,



But if you think about it again, equity is the worst bank. It doesn't do anything there; it doesn't pay you a dividend or a rate of return, well unless it is a rental property. Real estates is a great investment but the worst bank. I have been reading a lot of RE investors who are constantly stripping away equity, putting most of it in cash bank reserves and using the rest to leverage more rental properties. If I had huge amounts of equity and some natural disaster happens, I?m the one out of luck; I rather be completely leveraged and have my mortgage company go after the insurance companies than face them myself.



What so many people made the mistake during the housing boom was that they didn?t build enough of a liquid reserve; they bought (re-invested) in hugely inflated areas or probably most likely just spent the re-financed money.



You also mentioned inflation, you home equity, cash, CDs, mutual funds, etc? are all under constant attack by inflation. Why not let inflation work for you, YES inflation will be my best friend, how? Again by leveraging! Why not put as little down as possible (again having enough reserves) and leverage as much as possible. Having a fixed interest rate say 30 years, interest only for the first 10, will ensure that your fixed payments will depreciate as the dollar gets weaker and weaker.
 
[quote author="awgee" date=1214310637][quote author="usctrojanman29" date=1214302482] Then you have to look at what kind of after-tax return that cash you would have sitting around could generate, but then again having cash laying around equals piece of mind which can be priceless. So it really comes down to a case-by-case decision.</blockquote>



I contend the entire reason the financial system is experiencing the credit crises is because of this attitude. Folks have forgotten to accurately calculate risk and are too focused on return. They do not know what "cash" actually is, and that cash and money may be similar but not equal.


And many may consider equity in real estate to add more piece of mind than cash laying around.


I think the next generation will know how to evaluate risk better than the present generation.


Question, and I do not know the answer: How many folks with a net worth of more than $5,000,000 have a mortgage on their primary residence?</blockquote>


On average it seems that new buyers are putting more money down. IR2's stats are showing on average 35% down. I met someone on this forum who bought a Serra in Portola Springs for $1.3M. Put $900,000 down and mortgaged $417,000. I was really impressed. Then I said, "Wait a minute, Are you are one of those spoiled Chinese kids with a Super Rich Dad, the he replied, "Haha, Panda I am self made starting out with debt from college. Then Panda was even more impressed. Panda was like like "I am NOT Worthy!, I am NOT Worthy!"



When I looked at all the homes in Woodbury, PS, and Northwood II, the financing is almost night and day from the financing i am seeing from IR2's stats of new buyers.



CURIOUS QUESTION FROM PANDA????



I know Orange County is ranked #3 in millionaire households after Los Angeles County and Cook County, IL. If you have a net worth of $10,000,000 what percentile would that put you in Irvine? $5,000,000 and a $1,000,000? I guess I am just curious. Anybody have any guesses?



From household income standpoint this is the percentile in Irvine.

$200,000 and up - top 10% <- IPOP fits in this category: NICEEE!!!!! :)

$150,000 and up - top 25%

$100,000 and up - top 40%

$87,000 and up - top 50%



I would say that anyone with $5,000,000 networth would mostly likely pay off their $1M home in full with no mortgage. Again, this is what Panda would do.
 
from a macro view, the more you put down, the lower your risk profile. this is no different. 25w100 has the choice of either putting more down and accepting a known rate of return or investing that money into some unknown rate of return. by going the latter route, you need to realize you're making an implicit bet on interest rates, rent growth, or whatever you decide to do with that cash.



just my opinion however, after decades of financial innovation we're still finding that good ol' fashioned fiscal responsibility tends to be the right approach.

leverage is everybody's best friend in theory. but we've seen it cause yesterday's problems so i'm skeptical it's the right solution for today. with the right assumptions, you can always justify to yourself that you've got a sure-fire plan to beat the boring old conservative approach. will it work? maybe... maybe not.



people who waste their money on home equity might be boring chumps. what i do know is these chumps tend to apply that same conservative approach to the rest of their lives, and over time they have substantial savings, healthy retirements, and rarely default on their homes. people who have a plan to beat the boring old conservative approach are often very successful, but just as often barely scrape by, and have higher rates of default for obvious reasons.



but it's really up to what type of appetite for risk you have.
 
[quote author="roundcorners" date=1214351546]Awgee,



But if you think about it again, equity is the worst bank. It doesn't do anything there; it doesn't pay you a dividend or a rate of return, well unless it is a rental property. Real estates is a great investment but the worst bank. I have been reading a lot of RE investors who are constantly stripping away equity, putting most of it in cash bank reserves and using the rest to leverage more rental properties. If I had huge amounts of equity and some natural disaster happens, I?m the one out of luck; I rather be completely leveraged and have my mortgage company go after the insurance companies than face them myself.



What so many people made the mistake during the housing boom was that they didn?t build enough of a liquid reserve; they bought (re-invested) in hugely inflated areas or probably most likely just spent the re-financed money.



You also mentioned inflation, you home equity, cash, CDs, mutual funds, etc? are all under constant attack by inflation. Why not let inflation work for you, YES inflation will be my best friend, how? Again by leveraging! Why not put as little down as possible (again having enough reserves) and leverage as much as possible. Having a fixed interest rate say 30 years, interest only for the first 10, will ensure that your fixed payments will depreciate as the dollar gets weaker and weaker.</blockquote>
If you like reading about RE investors, try "The Millionaire Next Door" and "The Millionaire Mind".


Who said equity was a bank, good or bad? Your house, when you own it, does not pay you a dividend. You live in it. The risk is negligible. Do you realize that your assessment of risk includes only natural disaster?


Just because the dollar depreciates does not mean that you will have any more dollars with which to pay the mortgage. And if price inflation is a result of raw material inflation, you may actually have less dollars to pay the mortgage.


Very few people understand the causes and effects of inflation.


<strong>Debt DOES EQUAL Liquidity!</strong>


<strong>Debt DOES EQUAL Liquidity!</strong>


<strong>Debt DOES EQUAL Liquidity!</strong>


If you have debt you are not liquid. If you have $1,000,000 in the bank and owe the bank $2,000,000, you are not liquid. You are in debt.
 
I think the problem comes in when we believe that our primary residence is an investment. It is your home and I don't believe it should be counted as an investment like your stocks or rental properties. When money magazine had a report of millionaire households in Orange County, they did not include one's equity in primary residence as part of their networth.



Personally for me, no matter how much cash I have on hand, I don't feel comfortable when I have a mortgage that is more than $417,000. If i were to buy to a $650,000 home in Irvine, that would be mean I would only need $130,000 down (20%) and a mortgage of $520,000. I feel much safer putting down $233,000 and getting a mortgage of $417,000. The problem is that most of us are not diciplined to keep our cash liquid and not spend in bad speculative investments or spend it. For example, even for Panda, I am constantly tempted to put some of my down payment money in speculative assets like gold, silver, asian stocks. Once that equity is in the house, you can't gamble with it.



I learned a great deal from many of you that my Irvine Down Payment fund is not gambling money, so I need to put in a 100% safe place CD or Money Market, and not dump into more gold or foreign currencies. I am constantly tempted that gold can go up to $2000 an ounce by next year from books I read and looking at CNBC every morning, but I can not gamble with my down payment fund. That could be a problem when you have too much cash and you are not disciplined to keep the cash liquid. Many of us fit in this category.



Panda
 
25w100K... I assume you've done the right thing with your money by saving and waiting. Anybody who hangs out around here can see the direction of the trend line going down for at least a few more years. So my question for you is why would you want to "double down" on a depreciating asset in the short term? If you get a loan without a prepayment penalty you can always use the cash to pay down the balance.
 
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