How much of a down payment should I put on my primary residence?

Mitch Kronowit

SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes

16y

Originally posted by Mike L.:

I have the money to put down a large down payment on my primary residence, or possibly buy it outright, but should I?

In general, I prefer as small a down payment as possible, but that has to be weighed against other factors, like paying PMI (flushing cash down the toilet). The ability to purchase the entire property outright is an enviable position as well, but then you have to start looking at opportunity costs, i.e., what else can you be doing with that money?

In between paying all cash and 100% financing is a happy medium where you can get good finance terms without draining all your bank accounts. After all, what good is owning a house outright if there's nothing left for groceries?

3 Reply

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

16y

Didn't really follow the post just above mine....? Anyway, anything above 80% LTV in one loan, will require MIP or PMI which is a premium for insurance to cover a per centage of the loan in the event you default. When you factor this in, your effective rate or APR will be higher. But, so long as you payments are manageable, and since you intend to sell or lease the property in the future, obtaining the higher loan is probably a good bet. I hope you're going for a fixed rate! Keeping you cash in this situation is a wise move, IMO. Good luck, Bill

Bryan Hancock

Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes

16y

This question is really difficult to answer without knowing a great deal more about your situation. The Mortgage Professor's site has a TON of great information to educate you about the right loan product. I would suggest you read through a bunch of the articles on there before you decide what to do.

Debt is so cheap right now that I think you would be foolish to buy the house all cash. I would recommend putting enough cash down to get a very good loan product. 30-year, fixed-rate debt is in the 4.5%ish range right now and is likely closer to 4% if you count tax shields. You won't find cheaper debt anywhere than that so I would suggest you finance your home appropriately and invest your cash in deals. Keep in mind you should keep some cash liquid for staying power too.

Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

16y

Mike L- Fullerton!! My birthplace and the home of Weese Investments, 2701-2751 E. Chapman Ave. Go past it and see if the two buildings are still called Weese Financial Plaza. I bought it 35 years ago and made my money there.
As to your question. I also agree to keep the equity low. You're really buying an investment property, that may be sold or may be rented out in the near future. Therefore, minimum down with manageable payment, keep ADAQUATE reserves , and buy some more property . Rich

Vikram C.

Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes

16y

Many sellers will give a fairly significant discount if you are a cash buyer and can close quickly without a financing contingency. So it may be worth making low-ball cash offers on a few properties that you like and seeing if you can get a great deal and then refinance at a comfortable LTV and invest the proceeds into your investment ventures.

I once had a buyer who claimed to be a cash buyer, got a discounted price from me, and then went ahead and financed the deal. I did not object because he was able to close by the deadline and the financing contingency did not exist. So you can do this as well if the loan terms are better for an acquisition than a refinance.

6 Reply

Jeffrey K.

Real Estate Investor · Milwaukee, WI · Member since 2008 · 1k+ posts · 671 votes

16y

Are you in Jumbo loan territory? If not, I like these FHA programs for you with a low down payment and rates in the high 4s. I would make offers with 45-60 day close and offer low. Pay cash if you need to and finance if you can. If you pay cash you can still refi or use it in a line of credit once you get established.

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

16y

Hi, Vikram passed on a good idea or strategy, but just as a caution to those thinking of trying it, you better be able to close on the closing date (unless there are title problems) as you are committed to buy. If your loan drags out at all, for any reason, the seller could have gotten a better offer, stick you with default (generally 10%) and sell it to his other buyer! I have made offers like this but you better be able to perform. Bill

Vikram C.

Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes

16y

Bill is right. My buyer had already arranged his financing AND he also had cash in the bank to close quickly. So he took a chance on the financing coming through in time and was able to do it. If you decide to go this route, I recommend that you do your due diligence on lenders in your area and find one that has a track record of quick appraisals and closes and make your cash offer with a COE based on when they can close.

Mitch Kronowit

SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes

16y

Originally posted by Jeffrey Koenig:

Are you in Jumbo loan territory?

I assume Mike is looking for a primary residence in Orange County, CA, which IS jumbo loan territory, unless he wants to live in a shoebox. :wink:

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Account Closed

OR · Member since 2008 · 1k+ posts · 845 votes

16y

I like to have my primary paid for. It has to do with comfort level.

A couple of considerations: If you have all cash, you can make insultingly low offers and get yourself a real bargain.

Cash is a very strong position for offering on foreclosures.

If you do not have a mortgage on your home, your debt to income ratio should be exceptionally good and make it easier to obtain financing for a rental property.

I'd pencil it out. Free and clear home with a mortgage on a rental vs a lower mortgage rate on a home and a free and clear rental, vs financing everything and buying a home plus a couple of rentals. keep in mind your debt to income ratio, because banks aren't so generous about considering rent as income as they used to be.

My opinion is that this is not a good market to get over-extended. It's difficult to sell if you discover you can't make the payments, and the tenant pool is weak, with some tenants losing their jobs with the weak economy. So be very conservative when you figure possible income from the rentals, so you don't get yourself backed into a corner.

4 Reply

Mark UpdegraffBusiness Member

Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 693 votes

16y

Buy your investment property first and get it leased so when you go to buy your primary you can use the income from the rental. Otherwise you're going to ding your Debt to income ratio when you buy your primary first.

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Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

16y

I liked the points by PNW and Mark, HOWEVER------ There are some benefits to investors/owners by having a mortgage on their home. I choose to live in a nice home, mortgaged to the hilt for the interest deductions(one of few interest deductions still allowed). I have other homes F&C if I need to have one available in case of catastrophe. This provides me the same living conditions, more deductions, and a security blanket if necessary.
This is same philosophy as I have on parrallel investment/income streams debated a week or so ago. I'll stand on the same beliefs. Rich

Steve Babiak

Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes

16y

Rich - all good points. One thing that W-2 earners have to watch is that personal residence mortgage interest deductions phase out as income (AGI) goes up; if in that situation, it is actually best to have mortgages on investments where interest is always deductible, and no mortgage on personal residence (where deduction would phase out).

Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

16y

Agreed Steve- as you know, I have mortgages on both rentals and personal residence- in one of my portfolios... Rich

Mitch Kronowit

SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes

16y

Originally posted by Steve Babiak:

... it is actually best to have mortgages on investments where interest is always deductible, and no mortgage on personal residence (where deduction would phase out).

The deduction (loss) allowed on passive income, e.g., rental properties, phases out also above an AGI of $100,000 and falls to zero at $150k unless one of the filers is a real estate professional.

Steve L.

Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes

16y

I just bought my primary residence free and clear, I got a big discount about 25% for going that route.

The refinance process has been pretty difficult.

If you can go FHA... that would have been my first choice.

Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

16y

Mitch- as you know, it doesn't take much to be a real estate "professional". For those that don't know, you don't have to have a real estate license. Rich