Better to put 35% down and get lower interest rate or better to put down less to have more money in the bank?

Question

We are purchasing our first home and are very excited but soooo confused. We have saved our money and can comfortably put down anywhere from 20% - 30% and still have a nice cushion of savings in the bank. In CA where we live, you get a 1% lower interest rate on a 30 year fixed if you borrow less than $729,000 for your mortgage. BUT that would require us to put 35% down, which would effectively wipe out our savings.

Can anyone provide guidance here?

What's the wisest course of action, and why?

Should the "write off" of interest for taxes make a difference (i.e., put less $$ down, pay a higher interest rate to borrow more, but write it off at the end of the year.)?

Answer 1

Dear Mango,

           California property values are generally in free fall. In the Bay area property values are slowly declining but otherwise, slow down your purchase plans unless the issue of home equity is meaningless. Notwithstanding, put down the minimal down payment required by the lender

and the savings maintained to cover your payments in the event of an unexpected illness, job loss, business setback or pregnancy.

     Interest is not your only consideration. More homes are coming into the market every week.

The UCLA Anderson School of Business predicts continuing California real estate price decline through 2009 and beyond.

      Do not let excitement and joy with the prospect of your first home overcome practicalities an common sense.

      Best Wishes  

Answer 2

I just went through this and opted to put down a larger down payment. However, each person's case has to be decided individually.

When you say wipe out your savings that sounds risky. A lower interest rate isn't worth a thing if something happens, you can't make payments for a few months, and you have no nest egg to carry you through that time.

Do what gives you peace of mind. Is a lower interest rate worth it if you lie awake at night worrying? Only you can decide how much of a rainy day fund you need.

Taxes: For every dollar you pay in interest you do get a tax break but it's far less than a dollar. In other words, who in their right mind would spend a dollar to get a dime? Paying a higher interest rate to save on taxes falls into this category.

Answer 3

set up a budget. 20% down is typical. have a rainy day fund. if you have funded your 401k. you can always send in a higher mortgage payment.

Answer 4

This is a risky strategy, but it may work if the housing market recovers in the next few years.  

Get a 7/1 ARM.  Your rate will be around 6% for the first seven years.  You will have to put 20-25% down.  Here's the risky part:  The loan limits are based on the median sales price in the area, so if the median sales price goes up in the next 7 years, you can then refinance into a 30 year fixed rate at that time without the 1% hit.  If not, you'll have an adjustment to your rate.  Since we seem to be at or near the bottom now, its reasonable to believe that we will be better in 7 years.  However, it is a gamble.  Personally, I would keep as much cash as I can in this economy.