Put more cash down or take bigger mortgage?

Personally, I'd buy a less expensive house. Neither of those approaches seems remotely prudent.

how do you plan on getting approved for a mortgage under scenario #1 or #2 (especially #2)?

We're approved for the amount needed because we've shown strong bonuses - so much higher total income on tax returns for the last 10 years vs. just the salary. Again with the salary alone we break even, but with the bonus we save a lot.

it depends on your mentality of "opportunity cost". if you're keeping your $$ in a CD/MM/Savings account at 1-2%, then do #1. if you feel that you would invest it and get 5%+ return, then #2.

Is your salary large enough so that you can use that for housing and bonus to save and invest? Essentially what Jordyn said. I rather live in a smaller house/apt and know even if I get laid off and can't get a job for 5 years I will be ok.

Well for scenario 1- if we lost our jobs and had zero income we could last ~2 years

For scenario 2- if we lost our jobs and had zero income we could last ~3.5 years

4thGenNYer or 3rdGenNYer didn't take care of the down payment for you?

In any case, I agree with jordyn. Get a cheaper place. "Basically break even with mortgage taxes living expenses" = "Living paycheck to paycheck" right? You might have enough money to last 2 or 3 years, but you will feel the stress way before that. Losing both jobs might seem like the worse case scenario, but it isn't...

"You might have enough money to last 2 or 3 years"

Everyone thinks they have more than they really do.

I have two unemployed friends who blew through their "2 or 3 year" cushions in less than a year.

If you think there is going to be inflation or hyper inflation, you should pay down as much as possible. If you think there is going to be deflation, you shouldn't buy at all and wait for people who are not great with financial planning to go belly up and then buy their home at pennies on the dollar.

For your worst case scenario, where you lose your jobs (and your health care) have you considered the costs of health care or serious illness in your model? Higher taxes, rising maintenances? Loss of stocks or other assets? All possible. And more.

"4thGenNYer or 3rdGenNYer didn't take care of the down payment for you? "

No we saved for 10 years ourselves. Neither would have the means to help us one dime. In fact we have helped THEM out during the downturn if you really must know.

"If you think there is going to be inflation or hyper inflation, you should pay down as much as possible. If you think there is going to be deflation, you shouldn't buy at all and wait for people who are not great with financial planning to go belly up and then buy their home at pennies on the dollar."

We think hyperinflation- otherwise quite frankly we prefer renting and would rent forever.

"For your worst case scenario, where you lose your jobs (and your health care) have you considered the costs of health care or serious illness in your model? Higher taxes, rising maintenances? Loss of stocks or other assets? All possible. And more. "

Yes we have healthcare costs built in and higher taxes at 3% per year. Most of our assets are cash and bonds. Very little in stocks.

Good point on the health insurance, apt23.

Most people, when they compute how much of a financial cushion they'd need in the event of unemployment, fail to factor in the cost of COBRA or self-insuring, which for even a single person can approach $1,000 per month they're NOT paying as an employed person.

"If you think there is going to be inflation or hyper inflation, you should pay down as much as possible"

Hmm? Inflation helps debtors, especially long-term debtors such as mortgage holders. If you think there's going to be inflation or hyperinflation, then you should borrow as much as possible.

I'll amend my previous advice if you *really* think your bonus is income is reliable. In that case, I'd go with scenario #2 so that I had the bigger cash reserve if my assumptions turned out to be incorrect (at which point, you'd have time to sell or otherwise look for a cheaper housing situation).

what happened to that good old fashion advice to go out there and get the 'biggest you can' b/c down the road it's so going to pay?

How much a person is willing to put down also depends on their age. If one is older, then putting down more cash may be best.

But for now rates are still very low and I would put down the least amount of cash. Money is so cheap, how can one not do this.

apt23: if u think inflation/hyperinflation (good guess), you should NOT prepay your debt(assuming a fixed rate mortgage).
I repeat: NOT prepay. on a post inflation/post taxes u will come way ahead.

apt23 wrote : "If you think there is going to be inflation or hyper inflation, you should pay down as much as possible." I don't get that strategy. Inflation benefits debtors.

If you think there will be hyperinflation then the larger mortgage debt will look good because the additional mortgage debt will be devalued through the hyperinflation. For example, if inflation ran at 5% per year, a fixed rate mortgage with a 5% APR would basically amount to an interest free loan after adjusting for interest (i.e., the bank wouldn't be earning anything in real dollars as it would only keep up with inflation). But I would add that unless you are investing the extra cash you keep with the smaller mortgage in an asset that would be expected to rise with inflation, then that extra cash will be subject to the same effect, so the value of the cash/bonds would also be devalued in a similar fashion and the favorable impact of inflation on the mortgage would be negated. I think there are some new bonds being issued with an inflation hedge built into the return, so if you have enough conviction on the inflation issue, that type of instrument might be a good place to park your extra cash.

That said, my wife and I agonized through a somewhat similar analysis and decided to put more down. We needed to put down 20% and could put down as much as 30% and still leave a cushion we were comfortable with. We didn't have a strong view on the inflation issue (our best guess was a low rate of inflation), and so we didn't really factor that into the equation. As we went through the analysis and crunched some numbers, the biggest variable ends up being the rate of return you assume on the extra cash you keep behind (which should also include the additional tax break for mortgage interest on the incremental amount). We ultimately decided to use a fairly conservative number for that return, which moved us towards the 30% down payment. We were also surprised that we needed to really factor in the mortgage tax (about 1.8% in our case), which also helped push us towards the 30% approach. It isn't a huge factor over the expected life of the mortgage, but because it hits up-front it is something to also keep in mind. We have also been fairly diligent about tucking away the extra money each month that would have otherwise been needed to service the higher mortgage and we won't make any optional prepayments on the mortgage in the near future (which we might have done with the 20% down payment), and so we figure that over time the two approaches will even out and allow us to have about the same amount of mortgage and investments either way, but avoid that pesky mortgage tax. Our situation is a bit different from yours because my pay isn't bonus-heavy, so we make up the difference on an ongoing basis but it looks like your first real shot at leveling out the two approaches won't come again until next year when the next annual bonus hits.

There were also some very important factors that we tried to quantify but couldn't really put a good number on. The first is the peace of mind that it will give you to have the extra funds lying around if you go with the smaller down payment. The second is that if you look at a mortgage as a put option on the property because if the value plummets you could walk away and only lose the equity you put in, the extra down payment makes that a more expensive option. But as buyers, we of course just assumed there is no way something bad could happen to us and the value of OUR apartment will never decrease!

"The second is that if you look at a mortgage as a put option on the property because if the value plummets you could walk away and only lose the equity you put in, the extra down payment makes that a more expensive option. But as buyers, we of course just assumed there is no way something bad could happen to us and the value of OUR apartment will never decrease!"

This isn't true in New York. Banks can go after your other assets if you default on your mortgage and the sale of the home doesn't cover the outstanding balance.

Strategic default is probably a totally different topic for another thread, but for what it's worth my understanding of it is that while only a few states are truly "non-recourse" in the sense that laws prevent banks from going after your other assets, banks very rarely bring suits to try to recover on assets other than the mortgaged property. Compared to other states, I think New York is somewhat more favorable for defaulters because it is what they call a "single-action" state, which basically forces the bank to decide whether to foreclose on the property or sue you and try to recover based on the assets you own, but they are prevented from pursuing both courses of action. So as a practical matter banks will almost always choose to foreclose and take what they can get on the short sale.