It was also the norm to put as much of a down payment as possible when purchasing, and to pay off your mortgage as quickly as possible. At the very least, most homebuyers would put a 20% down payment so they could eliminate needing mortgage insurance.
With interest rates being at all-time lows, putting 20% down or more may not always be the best option. Particularly when you consider what your rate of return could be if instead, that down payment was invested elsewhere.
For example, if a buyer were to purchase a home at $400,000, and put 20% down, the buyer would be financing $320,000. A principal and interest payment at 4% would equate to $1,527. If that same buyer instead put 10% down, they will be financing $360,000 with a slightly higher interest rate to offset the monthly mortgage insurance (a topic I’ll discuss further in another blog). In this scenario, the principal and interest payment will be $1,770.
The average buyer would look at this situation and determine it unbeneficial for them because they will be paying an additional $243 per month. However, the savvy buyer may consider the return on investment (ROI) from the $40,000 that the buyer is saving on the down payment. The buyer will pay an additional $243 per month so it will be an additional $87,480 in 30 years. However, if the $40,000 were to be invested in an investment vehicle that is returning at 7%, that 40,000 will be $324,659. This will give the buyer a net ROI of $237,179 after the 30 years.
The bottom line is it’s important to not only look at the interest rate and down payment when considering your mortgage. Since there are many factors to consider, it’s imperative you work with a knowledgeable mortgage lender who is able to provide you with all of your options.
Visit us online to try our mortgage calculators or download a copy of our homebuyers guide.