When is it worth it to put a large downpayment vs taking on a larger mortgage?

It's never a better idea. That $250k spread could easily earn you $25k with average stock market returns, higher if you invest in preferred stock. That's $2,000 per month toward renting a place, and I bet you can rent a virtually identical place for half the cost.

The one negative thing about putting down more money is that you can't get most of that back unless you sell (even with a cash-out refinance you will probably limited to 80 LTV). Its money you put in that really doesnt work for you. However, with the higher mortgage youre making more interest payments through out the loan. Id say its better to put a lesser amount and have reserves. You just never know when you may need extra cash for whatever reason. Our "higher conforming loan limit rates" are drastically coming down on Monday. That should make the difference about 50 bps. It may be a good idea to compare to see what the rate difference is then. And consider a 20% down off 800k to avoid pmi. sunny_hong@countrywide.com

Any fundamental reason why the higher conforming loan limit rates are coming down on Monday? Did the GSEs lower fees?

I think you need to look at your tax situation as you analyze this one -- if you take the larger mortgage are the deductions going to help you?

Also, we don't know what your income is, but that's a factor too. The rule of thumb I give people (I'm a real estate agent and writer) is a loan balance of 2-3x HHI. If your HHI is less than $215K, I would go for the smaller mortgage. You will be giving away some potential upside on what your money could be earning in alternative investments, but I'm one of those "sleep soundly at night" people.

ali r.
{downtown broker}

Go to:

http://www.housemath.us/

Plug in all your information, press "Analyze" and all will be revealed.

You are making decisions involving a large percentage of your net worth. It is smart to seek out opinions from others on boards like this. But before you make a final decision, I think advice from a trusted financial advisor who can layout the long-term picture of various scenarios in a spread sheet and walk you through each is important. The kind of decisions you are making potentially can have significant impacts on your net worth in 10, 20 , 30 years...right through retirement. Ask friends or colleagues or family members if they have an independent advisor whom they like (I feel strongly the advisor should have no ties to a bank or brokerage house or mutual fund group, etc). Many advisors do not charge you to draw up the kind of spread sheet we're talking about and ultimately charge a percentage of your assets they manage per year should you sign on with them (.5% is a reasonable fee).

So keep learning, but ultimately seek professional advice from an independent counselor.

If you consider the bigger mortgage but have additional funds available or monthly cash flow, then consider taking a 15 year mortgage which will be at a lower rate. As it amortizes faster, you can get closer in fewer years to a conforming loan amount when you can refinance, when rates are favorable, to a conforming 30 or 15 year mortgage.

And on Kyle's post - I agree. Don't take too much advice from a bunch of anonymous yahoos on a message board.

can you take the higher mortgage but place the extra money on deposit with the lender with interest being calculated on the net balance. This was you pay the lower interest but have access to the cash if required.

What if you didn't really need a mortgage? Is it financially more sound to invest your money in real estate and have no mortgage payments or invest it in the stock market and have mortgage payments? We are empty nesters who are not that young anymore. We plan to live in this apartment, so it is not just an investment for us, it will be our home. Any thoughts?

kewlly - No exact fundamental reason. Just going off a memo we got today. Will know details next week.

kewlly, put 20% down and go get a 7 yr ARM which will beat the conforming 30/yr fixed rate you quoted above. Calculate the value of one years worth of mortgage, tax, and maintenance and put that amount into a risk free account as reserve. Anything else you have left over, invest in a good index fund. If you can do all of this, you will sleep very well at night.

shong, please share the details with us when you get them next week. Would be interesting to hear what the news is.

I will benefit fully from the larger mortgage (pretty much highest to second highest tax brackets for federal, city and state and the mortgage interest will be my main deduction). This is the thread of logic I'm currently following:
I have a view that rates are likely to be higher in the next 5-10 years as inflation picks up. Just to have peace of mind, I think I'm limiting myself to deciding between the 30-yr fixed higher conforming limit (someone needs to come up with a better abbreviation to describe this) mortgage vs the conforming limit mortgage with the higher payment.

I'm thinking of going with the larger mortgage, as it's valuable having the extra cash on hand just in case anything happens. Even though I'll be paying 75bps more interest in the meantime, I always have the flexibility of prepaying the larger mortgage with the extra cash on hand if my situation becomes more favorable and I don't need that extra cash on hand, and I'll only be paying that extra interest up till the point I prepay/refinance.

Is that sound logic?

You can make cases for both. We call it the 30yr HLL (higher loan limit). Will update on our new 30yr HLL product.

Update on the new 30yr HLL pricing. Not exactly sure why but we have priced aggressively from previous weeks on the new 30yr HLL product. The spread between regular conforming and new conforming is only 25bps. No details on why this change happened. I think the start spread was way too high and banks got a better feel for where it should be now. sunny_hong@countrywide.com

That's good news for me. Seems like a no-brainer to take the larger mortgage in this case. To pay 25 bps for the extra liquidity seems relatively cheap (also considering these HLL limits are only for this year and expire in December, kinda like a short-term discount relative to jumbos with the GSEs taking on some of my credit risk).

kewlly - please email me if you have any specific questions about your mortgage such as rates, etc.

That is good news. I made 2 people very happy today. Im not sure if this is just us or not. Let me know if you do find out.

"It's never a better idea. That $250k spread could easily earn you $25k with average stock market returns, higher if you invest in preferred stock. That's $2,000 per month toward renting a place, and I bet you can rent a virtually identical place for half the cost."

Man thats an atrocious answer. First you start with its never a better idea, notwithstanding that obviously if the spread was wide enough between the rates, it could be a no brainer. Theoretical sure.

I'm glad you're "easily" making 10% stock returns.

Then of course you through in the unsolicited, buy/rent jab, without of course having any basis whatsoever for your conclusion.

kewlly, I would strongly advise you NOT to go the route of the 30 year fixed. Given that you apparently have so much extra liquidity, I don't understand why you would. At worst take a 15 year fixed.

I don't think it's always a no brainer, just in this particular case, where the spread is 25bps and I have maximum tax deductions it is. I don't believe in a 10% equity risk premium or $2k rentals in Manhattan.

What would be the benefit of the 15 year fixed? Seems like it would be again tying up liquidity (not upfront but month to month in terms of fixed obligation). Guess I would have to weigh if the rate discount on a 15 year is worth the cost of that (also taking less advantage of the tax deductions).

the 15 is a compromise on the liquidity at a much better rate. the 30 year rate just aren't very good. if you want the max liquidity go for a 10 year arm, just don't see what the point of the 30 year is especially in your situation when you could pay down a large portion of the mortgage if you had to.

kewlly, how long do you plan on staying in this place?

Probably 3 to 5 years, but I'd rather not take out an ARM as I may want to hold it for longer and have a view that rates will probably be high in 5 years time. Also doesn't feel like the ARM discount is really that large, and there's no HLL discount for the ARMs. 15 year is an option I never considered, am looking into that now.

If there isn't a great discount with 15 year, you can still do a 30year and find one which you can prepay. Then you can just choose to prepay more earlier but still lock in a 30-year rate.

Yup, I'm thinking of just going with the 30yr if the 15yr doesn't have a substantially lower rate, for the exact reason you gave. Interesting that in a 15-year mortgage, the monthly payment is higher, but almost all the increase vs a 30-yr monthly payment goes toward the principal and not the interest (so you don't really gain extra tax deduction benefits from the higher monthly payment).

The 15 year isnt priced well with the new HLL. 5/1 is priced pretty low although I know you dont want an ARM.

it does seem like the 30 year rate for a loan of your size is pretty competitive. I have been looking at loans in the 1.5-2 range and there the 30 year is just atrocious, you just can't justify it.

Yeah, jumbos are insanely expensive right now relative to conformings. Turns out this higher loan limit is actually going to make a meaningful difference to a small subset of buyers. As shong said, spread above comforming 30 year is only 25 bps.

Yea, the 30 year in the 1.5-2 range will be about 7. But the 5/1 will get you into the 5s.

shong - I think you shouldn't even be talking about the 5/1 arm when she said should could be there 5-10 years. Never mismatch the term of liabilities with expected cash flows. ..that's what got us (including your firm) into this mess in the first place.

I was just stating the facts. Im not telling him/her to go with the 5/1.

"Never mismatch the term of liabilities with expected cash flows. ..that's what got us (including your firm) into this mess in the first place."

What got us into this mess is that a lot of people are incredibly dumb. There's nothing wrong with a conventional arm, no one has gotten really hurt with a conventional arm, how do I know? because rates are still low. People got hurt with these crazy arms where they're paying x for 12 months and 2x thereafter even though rates didn't really rise.

Well if that conventional ARM is for someone who only expects to live in a place for 5 years - then that's fine. . . .

No need to explain ABCs of how these things work to me. I didn't elaborate but generally speaking if you plan to stay at a place for 10 years, you shouldn't then take out a 5 year ARM and hope to refinance it for better especially in a low interest rate environment.

Yes, I know the story for why we are where we are today is more complicated (no-doc loans, over-leveraged consumer, low income to debt etc.). Thanks I know smart people who take out ARMs which match their expected investment horizon. You are preaching to the choir. Shong is a salesperson for countrywide though so I thought I might point it out especially with his comments.

girlygirl77, shong has been respectful of this forum and has given reasonable input to a number of discussions. I personally think a mortgage brokers opinion is a valuable addition to this board, as long as it doesn't turn into a constant sales pitch. There are other professionals on this board (e.g. urbandigs) that give valuable information without being in your face. If these guys get some business based on educating people and giving good advice, what's wrong with that?

Juiceman, your earnest comments pall . . .

porrishlady, I missed you!

girlygirl77 - So if i worked at chase and made those comments it wouldve been fine?? And when someone is comparing a 1M mortgage between the 30 year fixed and 5/1 ARM. We're talking about a $1100 monthly payment difference. They might want to know that option is available. My clients arent dumb. So if you wanted a mortgage for 1M, youd take the 30 year fixed with payments over 1000 higher every month? I think most people will take a chance on the ARMs. Did cfc do something wrong to you?

ccedvi said "it does seem like the 30 year rate for a loan of your size is pretty competitive. I have been looking at loans in the 1.5-2 range and there the 30 year is just atrocious, you just can't justify it." And I replied by saying "Yea, the 30 year in the 1.5-2 range will be about 7. But the 5/1 will get you into the 5s." Whats the problem?

Shong - sorry and agreed. You have been additive to this board. Accept my apologies for the criticism.

I was furious with shong when he first showed up and posted on so many threads that he blew out the entire timeline of the board. I thought he was going to carpet-bomb us with his email address and run. Then he stuck around and caught a bunch of insults, but he toughed it out, which I thought took some guts.

He comes right out and says he's a mortgage broker, so if you need a grain of salt when reading his posts, so be it. He's certainly put in his time around here; I think his posts are worth considering along with whatever else might be said on the subject.

On a related note, front_porch/Ali R. is up front about being a broker. Sure, some of what she says sounds a bit "brokerish," but she's given some really good advice, some that would help a buyer proceed without a broker.

I wrote this before refreshing the page and reading girlygirl77's post - not trying to give her a hard time.

girlygirl77 - no worries, you didnt need to apologize but apology accepted.