Looking for financial answer, not opinion on down payment size

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Looking for financial answer, not opinion on down payment size

Danny McGreevy
Investor · NH Mass and Maine - Based in Portsmouth, NH · Member since 2023 · 21 posts · 8 votes

I’m not interested in a personal situation answer, im interested in a pure numbers answer.  

I hope I can phrase this in a clear way.

Scenario: 

1) Is it better to avoid mortgage interest and put say 20% down or 


2) is it better to put down 10% to pay more mortgage interest if you can make the same returns on the money not put down? For argument sake, say that the mortgage interest rate is 10% and the returns of the money not put down are also 10% in the market

or is it the same result?


Don't consider PMI for this scenario

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Jack Seiden
Real Estate Agent · Washington DC · Member since 2016 · 847 posts · 656 votes
3y
Quote from @Danny McGreevy:

I’m not interested in a personal situation answer, im interested in a pure numbers answer.  

I hope I can phrase this in a clear way.

Scenario: 

1) Is it better to avoid mortgage interest and put say 20% down or 


2) is it better to put down 10% to pay more mortgage interest if you can make the same returns on the money not put down? For argument sake, say that the mortgage interest rate is 10% and the returns of the money not put down are also 10% in the market

or is it the same result?


Don't consider PMI for this scenario


Number 1 is easily the answer in number two you break even, take on 10% debt to make 10% in the market, there's zero real return there, so may as well not pay pmi. Than the 2nd part is obviously there is no risk adjusted 10% return that exist's so in reality you are taking on guaranteed 10% debt for a on average lower return.

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  • Account Closed
    Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
    3y
    Quote from @Danny McGreevy:

    I’m not interested in a personal situation answer, im interested in a pure numbers answer.  

    I hope I can phrase this in a clear way.

    Scenario: 

    1) Is it better to avoid mortgage interest and put say 20% down or 


    2) is it better to put down 10% to pay more mortgage interest if you can make the same returns on the money not put down? For argument sake, say that the mortgage interest rate is 10% and the returns of the money not put down are also 10% in the market

    or is it the same result?


    Don't consider PMI for this scenario


     #2

    1Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    3y

    For discussion.  1 point is 1% of total loan.  That gets you a reduction of .25%.  

    What interest rate are you assuming?  
    .     
    Not sure I’m tracking your question. If you want to pay 10% versus 20% down doesn’t really impact your interest paid other than the reduction in loan amount. 
    .     
    So what loan balances are you looking at?

    What interest rates are you using?  

    0Reply
  • Danny McGreevy
    OP
    Investor · NH Mass and Maine - Based in Portsmouth, NH · Member since 2023 · 21 posts · 8 votes
    3y

    @Henry Clark- I’ll try to word it more simply.

    Do the two scenarios get the same outcome?  No points involved 

    1) put 20% down at 10% interest rate

    2) put 10% down at 10% interest rate and invest the money saved on down payment in a fund that grows at a rate of 10%

    Does that make sense?


    0Reply
  • Steffen Cushing
    Lender · Franklin, TN · Member since 2022 · 33 posts · 8 votes
    3y

    not sure if i fully understand the question

    if you put 20% down on 1 deal you'll get 10% return? or you put 10% down and then keep the remaining 10% for another deal, you'll still get a 10% return combined?

    0Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    3y

    #2.

    REI is totally about leveraging other people's money. If you have an extra 10% you could put down on another deal you should do that .

    I would never do an REI deal for 10%. Each person has their own risk reward measure. We shoot for a minimum payback in 8 to 12 years covering "everything" on a purchased property. We are looking for a minimum 300% return in 2 years on a new development.

    4Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    3y

    Your framing of the question ignores the reality of other variables being more important…specifically the value assigned to risk of both the real estate return an d the return of the other investment.and the tax consequences of the investment type.

    A 10% return would be incredible in a federally insured savings account, for instance, and it would be awful if it was in a penny stock crypto fund moving into AI investing. One has more risk.

    2Reply
  • Danny McGreevy
    OP
    Investor · NH Mass and Maine - Based in Portsmouth, NH · Member since 2023 · 21 posts · 8 votes
    3y

    @Steffen Cushing - in this scenario, I’m talking about a singular deal.

    To help with clarity, I’m only viewing the initial 20% down payment.  Let’s use a 200,000 house as an example.  I have $40,000 available.  Interest rates are 10% in this scenario, and there is also a theoretical index fund that will yield 10%.

    option 1) put down 20% aka $40k and avoid 10% interest rates for any portion of the $40k

    option 2) put down 10% aka $20k and put the other 20% in the 10% returns index fund

    My question is, do both scenarios have the same outcome?

     

    0Reply
  • Danny McGreevy
    OP
    Investor · NH Mass and Maine - Based in Portsmouth, NH · Member since 2023 · 21 posts · 8 votes
    3y

    @Jonathan R McLaughlin - I realize this, but I want to understand some basic principals.  Can you see my response above and give me your thoughts?

    0Reply
  • Danny McGreevy
    OP
    Investor · NH Mass and Maine - Based in Portsmouth, NH · Member since 2023 · 21 posts · 8 votes
    3y

    @Henry Clark hopefully my response in the answer above helps with more clarity of the basic principal I’m seeking to understand

    0Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    3y
    Quote from @Danny McGreevy:

    @Jonathan R McLaughlin - I realize this, but I want to understand some basic principals.  Can you see my response above and give me your thoughts?

    For the 10% rerun on real estate do you mean overall return or cascade on cash?
    0Reply
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    3y

    @Danny McGreevy

    i get what you're asking, but that's just not how a lot of us think

    less down is generally better - but i don't think "what return to the decimal point can i get specifically on the exact amount of money i didn't put down"

    i think "what can i do with my portfolio / what do i want to accomplish"

    4Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    3y

    If you don't care about mortgage insurance (which adds up) or mortgage payments, then putting 10% down is better as you have that money to do other things.  The reality is (at least where I am), what you pay for mortgage insurance easily makes up the difference in the down payment (eg putting 5% down with insurance will cost more than putting 20% down with no insurance).

    Yes making 8% interest (for example) on the money you didn't use for the down payment will make you money from that, but you are also now paying interest on a larger mortgage (eg interest on $180K in your example instead of interest on $160K).

    3Reply
  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    3y

    It does simplify it but since we are in a real estate forum.  The answer is still 2.

    I can't answer without taking into account capital gain rate, depreciation, year one writeoff, value add, potential STR rates, appreciation. It's not a straight financial rate discussion.

    Thus I can’t answer your specific question. 

    3Reply
  • Jack Seiden
    Real Estate Agent · Washington DC · Member since 2016 · 847 posts · 656 votes
    3y
    Quote from @Danny McGreevy:

    I’m not interested in a personal situation answer, im interested in a pure numbers answer.  

    I hope I can phrase this in a clear way.

    Scenario: 

    1) Is it better to avoid mortgage interest and put say 20% down or 


    2) is it better to put down 10% to pay more mortgage interest if you can make the same returns on the money not put down? For argument sake, say that the mortgage interest rate is 10% and the returns of the money not put down are also 10% in the market

    or is it the same result?


    Don't consider PMI for this scenario


    Number 1 is easily the answer in number two you break even, take on 10% debt to make 10% in the market, there's zero real return there, so may as well not pay pmi. Than the 2nd part is obviously there is no risk adjusted 10% return that exist's so in reality you are taking on guaranteed 10% debt for a on average lower return.

    4Reply
  • Doug Coup
    Member since 2020 · 10 posts · 5 votes
    3y

    @Jack Seiden with #1 you get intrest deduction on taxes.

    On #2. You have taxes on gains (short, long, capital)

    So based on that rate you would have to make 10% plus the tax on the 10% where as #1 was a deduction resulting lesa tax but costing intrest.

    #1 is an known outcome. #2 might not generate equal retuens of 10%

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    3y

    Putting the least amount down possible stops being the best choice as rates rise too far above risk-free savings rates plus a reasonable risk premium of roughly 2%.  So at 7%, we need to do a good opportunity cost analysis.

    At 10%, we need to put more down if we buy the deal at all. 

    If my debt is costing 10%, I'm either not buying the deal if it has no equity built-in or I'm putting as much down as possible up to at least 20%.  

    That 10% is guaranteed while you're WAG index fund returns are far from it, especailly after a frothy run like we've seen this year.   

    1Reply
  • Todd Rasmussen
    Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
    3y

    @Danny McGreevy

    Putting down a smaller amount and investing providing you have some hold time is mathematically better. The graph of the mortgage savings is linear, the graph of investing the remainder from a smaller down payment is exponential.

    1Reply
  • Danny McGreevy
    OP
    Investor · NH Mass and Maine - Based in Portsmouth, NH · Member since 2023 · 21 posts · 8 votes
    3y

    Thank you @Todd Rasmussen this seems to be my ultimate conclusion

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Danny McGreevy:

    I’m not interested in a personal situation answer, im interested in a pure numbers answer.  

    I hope I can phrase this in a clear way.

    Scenario: 

    1) Is it better to avoid mortgage interest and put say 20% down or 


    2) is it better to put down 10% to pay more mortgage interest if you can make the same returns on the money not put down? For argument sake, say that the mortgage interest rate is 10% and the returns of the money not put down are also 10% in the market

    or is it the same result?


    Don't consider PMI for this scenario


    I understand your question.

    There's huge difference between mortgage payment and return of money from investment.
    The mortgage rate of 10% is different from money from investment bcause of the amortization factor. With mortgage of 10% the ratio between principal and interest is 1:6 to 1:8. You pay more interest in the very first 20 years.

    Because of that, in high interest rate environment it's best if you purchase the financing aspect, add more downpayment, choose #1.
    In low interest environment you would pick option #2

    In summary:
    in high interest rate environment ---> add more downpayment>
    In low interest rate environment ---> over leverage by putting less money

    1Reply
  • Joseph Neri
    Investor · Houston, TX · Member since 2019 · 95 posts · 29 votes
    3y

    I have a mortgage master course if you want to see it just DM me. It should answer your questions. I always go with the least amount as possible to put down on your home. Reason: Equity and Appreciation is not the same thing. Equity earns 0% return inflation will destroy your purchasing power if your money is sitting inside your house. The property will appreciate regardless or the market could crash you don't control that piece. You want your money is a better environment where you have more control.    

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y

    This is actually very good question, I would answer again from different approach.
    ----

    ) Is it better to avoid mortgage interest and put say 20% down or


    2) is it better to put down 10% to pay more mortgage interest if you can make the same returns on the money not put down? For argument sake, say that the mortgage interest rate is 10% and the returns of the money not put down are also 10% in the market

    ----
    Even paying 10% rate is very DIFFERENT with different term because of the time component.

    12% mortgage rate with 10YFRM is way way better
    than 9% mortgage rate with 30YFRM.

    Why ? because the time component of the debt is much higher when the time is longer and it create different amortization table/chart. The ratio of principal dnd interest is vastly different when time component is different with the same rate.

    About 15 years ago I found a mathematic formula where to make money the fastest

    The recipe is to over-leverage in place where appreciation > ( 1.5* mortgage rate | inflation rate )
    AND
    if possible, buy two back to back SF and IF possible buy with 10 FRM,15YFRM or 10YARM.
    Hence it's always best to buy with 10YARM. 

    Again, my answer to original question remain the same. 
    IF the rate is less than 5% like 2009-2021 era , option #2 is the best.
    IF the rate is higher than 6% like today, option #1 is safer. 

    Once you found the answer, always buy with 10FRM/15FRM or 10ARM if the money cost doesn't matter with you.

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    3y
    Quote from @Danny McGreevy:

    @Steffen Cushing - in this scenario, I’m talking about a singular deal.

    To help with clarity, I’m only viewing the initial 20% down payment.  Let’s use a 200,000 house as an example.  I have $40,000 available.  Interest rates are 10% in this scenario, and there is also a theoretical index fund that will yield 10%.

    option 1) put down 20% aka $40k and avoid 10% interest rates for any portion of the $40k

    option 2) put down 10% aka $20k and put the other 20% in the 10% returns index fund

    My question is, do both scenarios have the same outcome?

     

    Yes except for tax implications, future appreciation, risk, future investment returns, reinvestment rate, change in tax bracket, future income tax code changes, depreciation.  In other words no. 
    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    0Reply
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