If you don't know, now you know
Many of you stopped to read my post yesterday about the risks of waiting to buy a home while attempting to save more money. The biggest question posed to me after was regarding the size of the down payment. We're taught that 5% is a minimum amount and 20% is an industry high. what we aren't taught is the cost of purchasing a home that will increase in value regardless of the amount paid down and the loss we take from not investing.
I have attached an image below to explain in detail what this means for you as a consumer and will go into further detail after you see the difference 5%-20% down on a $300,000 home is.
If this picture looks familiar, its from my payment calculator which can be extremely useful for buying in the market.
The three things you'll want to pay attention to are the cost of mortgage insurance, down payment amount and the difference it makes on your monthly payment.
At 5% down you'll pay $11,400 in title insurance which is added to your mortgage amount after the down payment is applied.
At 20% down you wont pay anything but instead of tying up $15,000, you tie up $60,000.
And the difference between $15,000 & $60,000 is a mere $260 at 2.77% interest.
What does this mean in 5 years?
With 5% down you'll have a balance of $252,217 and an initial investment of $15,000. The key thing to remember is payments are front loaded with interest an on average only half will go towards the owing principal amount meaning over 5 years you'll have paid $44,183 to your balance & $37,895 in interest.
with 20% down you'll have a balance of $204,225 and an initial investment of $60,000. The key thing to remember is payments are front loaded with interest an on average only half will go towards the owing principal amount meaning over 5 years you'll have paid $35,775 to your balance & $30,684 in interest.
If we determine a 5% increase in home values over 5 years a $300,000 home will have increased in value to $382,884.47.
So in theory if we were to sell at $382,884.47 with 5% down we would have a return of $130,667.47-$15000 down payment =$115,667.47
If we sold with 20% down at $382,884.47 we would have a return of $178,659.47-$60,000 down payment = 118,659.47
Difference in return = $2992
That's not a great return when you look at the overall associated costs if you compare it to other investment opportunities and talking with any financial adviser there are many options. Guaranteed investments at 3%, safe investments at 5% or leverage liquid at 8%
How do you capitalize on this? Quite simply put down 5% on your home carry the additional $260 monthly payment vs 20% down and invest the $45,000 over 5 years.
At 5% over 60 Months $45,000 yield a return of $12,432.67.
Meaning 5% down on a home plus the invested portfolio brings a return of $128,100.12 vs the $118,659.47 the 20% down established to avoid mortgage insurance fees and a lower monthly payment.
The only other consideration to take into account is the overall carrying. at $260 monthly minus the principal return. The difference in interest is $37,895-$30,684 = $7211 to deduct from your investment.
Meaning 5% down with $45,000 will yield a return of $120,889.12.
$2229,65 greater than $60,000 down. It may not seem like much but I think many of us will agree 5% down is much easier to come up with than 20% down and utilized correctly there are many ways to increase your returns.
The answers are quite simple, its not how much you have but what you do with it. Put your eggs in multiple baskets and secure multiple investments with returns.
Stay educated, stay focused and at all times ask questions.