Big downpayment vs. cash on hand

[drewynp]

So, my wife and I had a little windfall last year. We were able to pay off all our debt and have about $170k on hand now. We have a tiny house and a toddler and really want to give him a little bro or sis, so moving out of our 900 sq. ft., 2 br/1 ba home was a must. We are closing on a bigger house in 2 wks. It's in a more expensive area, and our mortgage payments will be a few hundred more each month, no matter how much we put down.

After watching so much $ fly out the window each month for the last 4 years for minimum payments and debt, I was very adamant about putting down a lot on our new home so we would not be so strapped each month. But now I am excited about having some liquidity, and I am thinking of a smaller down payment ($120k), with $20k safety net and a $15k money market, with some left over to invest. I'll max out my Roth. I have a great 401k with my employer already.

My wife is a Masters student and stay at home mom with 2 years left in her degree and great promise for future hireability, so I am thinking that if I can just hold out for another couple years, we will no longer be a single-earner household.

My question is, is it wiser to try to put equity into our new home right off the bat, or to hang onto some cash? Once it's part of the down payment it can't be touched, without refinancing. After paying off debt, etc., I was offered a 3.75% interest rate.

Thanks!

[Spiffster]

Congrats on paying off your debt! I would say as long as you are not living above your means then your strategy seems fine to me. Putting yourself in a situation where you need to "hold out for another couple years" probably isnt the best plan though.
Keep in mind that daycare for two kids is gonna cost a pretty penny. Trust me, I know . Totally worth it though.

[autoxer]

My question is, is it wiser to try to put equity into our new home right off the bat, or to hang onto some cash? Once it's part of the down payment it can't be touched, without refinancing.

Putting more into equity can either accelerate paying off the mortgage or lower the monthly payment depending on your strategy, but either one is arguably better than the amount you earn on interest in a savings account.

If your strategy was to invest to try and get a better return than the interest rate on the mortgage, then it might make more sense to hold onto some of that cash, but you have to put it to work for that strategy to come out ahead.

How long is the mortgage that you are considering? What percentage of your income would going towards the mortgage, with the large downpayment and with the small downpayment?

[snafu]

Welcome to SA where we seek ways of using our money to accomplish our goals as effectively as possible. We believe in saving money. Congratulations on your new house. It would be helpful to better understand your numbers. Do you know your FICO score?

Will your DP be at least 20% to avoid the super expensive mortgage insurance? What do you anticipate as monthly costs in the new house? [insurance, tax, electric, heat, landscaping, 1% maintenance etc?]. Will you need to buy appliance, furniture, drapery, decor etc? Do you anticipate higher transportation costs? What percentage of your income will be required for housing costs all in? I hope you'll look at an amortization table to understand how your monthly payment will be distributed between principal, interest, tax, and any other items rolled into the agreement. What was the outcome of the inspection report?

When I read your brief outline I was left with the impression that prior to coming into a one-time sum, you were supplementing your income with debt, making minimal payments with a significant sum going to interest each month. Do you track spending to help identify money 'leakage?' [small sums inadvertently adding up significantly over the course of a year]

What costs are associated with DW's education? Are you making SL payments or are they in forbearance, yet to come? Are you carrying a car loan? What is the interest rate?

Sorry for all the questions...money management is full of craters....

[parafly]

My advice would be to put 20% down on the new mortgage (avoid PMI), and keep the extra funds liquid/invested through other vehicles. Your mortgage interest rate is relatively low, and after you take into account a mortgage interest deduction on your federal taxes, it's effectively even lower.

Personally, I like flexibility instead of tying up a large amount of funds in a non-liquid equity. Down the road, if you decide that paying down the mortgage is a high priority, you'll have the funds available to make a large lump sum payment at any time.

A best of both worlds approach is often the best one. Put down 20% on the mortgage, keep the rest liquid or easily accessible, and make calculated, extra principal payments on your mortgage each month which cuts the length of the term significantly.

[bjl584]

I'd do 20% down to avoid PMI and to give yourself a pretty good guarantee that you won't be underwater on the house. Then I'd invest the rest. Interest rates are historically low. You can make more on your money by investing it even in some of the more conservative investments.