Is It Worth Investing More Than 20% of the Value of a Home If You Can Afford It?
The national average down payment ranges from six to 11 percent , with some home buyers paying as little as three to 3.5 percent . But some people have the option to bet more than the suggested standard 20 percent. Should they do it?
This may sound tempting since your home is probably the biggest expense of your life, and lower payments and a smaller loan amount attract. But the fact that you can does not mean that you should.
“This is entirely ad hoc and depends on how comfortable you are with less liquidity,” said Jason Bateman, head of Redfin Mortgage. “If investing more money hurts your ability to adapt to invisible spending, it can put you in a quandary.”
Matt Ishbia, President and CEO of United Wholesale Mortgage , agrees, saying there is little value in it. “Basically, it’s like burying it in a basement, not getting any of it back,” Ishbia said. “You won’t get a better rate, the only thing you are avoiding is mortgage insurance, but you will lose $ 15,000 in your pocket.”
“How much you invest is a personal decision and depends on other options for investing that extra money,” adds Erin Lanz, vice president and general manager of mortgages at Trulia. “If you change your mind and want to pay off your mortgage earlier, you can always do it later.”
This first part is key: you can get a higher return by investing this “extra” money in a more profitable investment over time than if you immediately put it in your home or paid off other debts (say, student loans). Take this example from Garden State Home Loans :
If you are a home buyer and decide to shell out 30 percent on a $ 250,000 home instead of 20 percent, then you are spending $ 25,000 more ($ 75,000 less than $ 50,000) at the time of purchase. Imagine if you list that $ 25,000 in the stock market today. At a modest six percent annual rate of return (the average annual rate of return over the past few decades is seven percent), this initial investment of $ 25,000 would be nearly $ 144,000 at the end of the 30-year period.
One case where this might make sense is if you want to finance a larger or more expensive home, but can only afford a certain monthly payment. More preliminary information can help you with this.
But having access to your money is key in a home buying situation because chances are you will have a lot of unexpected expenses, as we discussed yesterday . And you want to be able to pay them off and have enough cash for a comfortable budget and have a fully funded emergency fund.