Ever since we put the purchase agreement in on our house, Mr. NTF and I have been discussing how much of a down payment to put on the house. This is a topic that interests me on both a practical basis as well as theoretical. Here are a few of our options and some of the questions that arise with each option:
Option 1: Standard 20%
Pros: With 30 year mortgage rates below 4%, this would be taking out the largest loan possible at this ‘low’ rate. Taking our a larger loan also leaves us with more money in liquid savings.
Cons: Increases our monthly fixed costs. It would be a huge stretch to afford these monthly costs on only one of our incomes. While we could do it in an emergency, it would not be ideal on an ongoing basis.
Option 2: Put down more than 20%. We’ve talked about putting down more than 20% but putting down more than 20% but less than 100% leaves a large range. The amount we’ve been considering is an amount that would keep our overall housing costs similar to what they were in our condo.
Pros: Keeps our monthly fixed rates low and at an amount easily affordable on one of our incomes. With a smaller mortgage, we’ll pay less interest over time and have a smaller loan balance to pay off in the future. With a smaller loan we would also pay lower loan origination fees as many of the fees are based on the size of the loan.
Cons: Ties up more cash.
Questions: What’s the optimal amount to have in liquid vs very illiquid assets? In other words, not including retirement savings in non-taxable accounts, what percentage of your money do you need to keep liquid?
Option 3: Pay cash
Pros: No mortgage! No mortgage application fees, which I’m slowly finding out are surprisingly high.
Cons: The biggest con is that this isn’t a viable option for us at this point. But I’m hugely interested in the topic from a theoretical perspective. Are there any cons to paying for a house in cash? I’m expecting someone will say that with interest rates this low, you can make more money putting your money in the market. But can you really? This certainly has not been the case recently and then there is also the issue of expected return in the market vs a ‘guaranteed’ return’ of paying down your mortgage.
Questions: This option brings up similar questions as Option 2. How much of your net worth should you keep liquid? Do you need to keep less money liquid if your paying cash since you would not have a mortgage and your fixed costs are lower? Interest rates are low but I keep hearing in the news that there are cash buyers in the market, so it must be possible for some people and it also must make sense for the right buyer.
At this point we are leaning towards option 2 rather than option 1. We were able to afford our condo on just one of our incomes and I like the idea of keeping our fixed costs low. We would tie up more of our net worth in the house, but we would still have a strong emergency fund.
Very curious to hear your thoughts on this topic if you them! How much of your liquid net worth would you tie up in your house? With 30 year mortgage rates below 4%, would you even consider putting down more than 20% on a home?