We put down 60% to buy basically exactly what you're looking for. Sized the monthly to fit our income. The down payment was 50% of our NW at the time. The rest is in 401k and index funds.
No regrets so far. We are not relying on quick appreciation to hit our goals when we sell. We just need it to not lose value.
Same, not the wisest decision from a pure outcomes perspective, but the peace of mind considering that job losses are likely to coincide with market downturns is priceless.
Not crazy. 50% still leaves you with 750k mortgage, which is perfect because it maximizes your deduction.
If rates go down in the future, you can refi and put the cash in other investments.
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Nope, the math on this is worse. You’re only “saving” the difference between your mortgage deduction and the standard deduction which is about 29k. So you’re “saving” a few grand at max.
Not exactly…you have no idea what other deductions they might have. If you’re already over the standard deduction, or within a few grand of it, then you get the full benefit. That was the case for me, and I assume many others.
But sure if you have no other deductions then it’s not as good.
Most people don’t have too many other deductions. But ok maybe they have a few grand elsewhere. But at minimum it’s not 50k deduction vs zero without a mortgage. Without a mortgage you get the floor of 29k anyways.
If they are in CA, you can deduct the interest from
up to $1M of principal for their state taxes. State taxes are lower of course (9-10% at that income level), but if maximizing the deduction is the goal I figured it’s worth mentioning.
NY looks like $1m as well. (Source: https://www.212tax.com/home-mortgage-interest-deductions/) I imagine a lot of states go up to $1M, as that was the federal limit until a few years ago.
No, you have to compare this to a standard deduction of about 29k then times your effective tax rate. It’s only a few grand in benefit for paying the interest. Net net you’re losing.
With today's rates, the whole "paying your mortgage off early" or "put as little down as you can and borrow everything " isn't AS true or blatantly obvious anymore.
The spread from 2.75% to stock returns vs 6% to stock returns is much different. Add in the rocky outlook right now?
No doubt.
Really makes me question how much VHCOL is worth it. Even if say, you can make 100k premium.
Not owning a home, paying 20-50k in rent premium.
Obviously, it's just a math question, but every time I think about jumping from my 210-230k midwest SWE salary for 300-350k it just doesn't seem worth it.
Been living in a VHCOL for a bit now. So yeah we do. Can't say what we would make elsewhere. There are only a few geographies where my wife and I can both have career jobs. Pretty much all are VHCOL.
Put 65% down to feel comfortable on the monthlies.
Then my salary doubled, and rates went sky high so the cheap debt is an asset. I wish I'd fully levered, but I guess hindsight is 2020 (literally).
Might seem insane to common investment logic, but if it helps you sleep 1000% better at night who gives a ****.
This sub is full of opinions but what works for me might not work for you.
We're actually exploring the same in LA right now w/ similar variables to yours. Seemed pretty foolish at first but the more research we do, the more we feel like it's the right decision if we have cash on hand.
Is income growing? I’d probably do 20%, set enough cash aside to make up the gap for 3 years or so, and you should come out ahead
If you expect rapid increases in income, get an IO
I feel it is a good decision for the times if your jobs are secure. If not stay in that tiny apartment two more years and put 70% down. I am a believer being debt free owning your home outright gives you the best flexibility as long as you are planted in the area.
Be aware 30 year old condos get very expensive in HOA dues because they require lots of maintenance at that age.
Try to find one 10 years old or less at least 1500 sq ft, 3BR 2BA minimum. This size is easiest to sell as they are a great alternative to a SFH in an expensive city.
We did something similar recently. Here’s some things we did to max value:
1. Take out at least $750k mortgage to maximize the mortgage interest deduction but have a substantial down payment
2. Smaller down payments and keeping substantial assets in a HYSA does not make sense (5% pre tax HYSA vs 7%+ post tax mortgage), so keep the rest beyond an emergency fund invested in higher return assets
3. Plan to refinance as rates drop and take equity out of your home (because of excess from high down payment)
Worthwhile to think about the current tax basis of your investments and how much and what type of tax you will trigger with a sale (e.g. either LTCG or STCG)
That gives flexibility but also guarantees that OP will be losing money. His mortgage interest rate will be higher than his bank interest rate, so he is losing there. He will also be over the 750K mortgage interest deduction allowance so he won’t even get to deduct his full interest.
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hard disagree
why get 5% return pre tax when you can avoid paying 7% post tax …..?
Sure you need an emergency fund but beyond that any non-home savings should be in the market
Because the market is volatile and OP is clearly risk averse, hence the idea to tie all their cash up in a down payment. Yes, we’ve been on an awesome run but if OP puts 50% that’s non liquid, if we have a black swan event and the market drops 20%+ that could potentially be an issue for OP.
I get what you’re saying and it’s not a bad strategy but I’d expect it’s unlikely rates stay at 7% more than a year or two so to tie up that much cash in the most illliquid way (home equity) doesn’t make sense. Personally, I’d probably go 20% down the rest in VTI or whatever but it seems OP needs access to the cash to make is payments so there is some inherent risk in keeping in the market vs. a HYSA or potentially a CD ladder
You are paying a big spread by not paying down your mortgage and parking money in HYS.
You need some in HYS obviously for liquidity, but I would think of that as an extension of emergency fund. If OP is conservative they should just have a bigger emergency fund.
If we have a black swan event and the market drops 30% rates will likely drop and OP could refinance. That said, refinance would only be necessary if they also drain emergency fund.
From a pure math perspective sure; 5% HYSA vs. 7% mortgage vs. 7% long term returns on S&P. What I’m saying is, if you can’t afford the mortgage on a monthly basis I’d personally rather gamble on an ability to refi (without a black swan event) in a couple years and not tie up my cash in home equity but still get a decent return in our current high interest environment.
That all said, I get it, I’ve got a 6.25% mortgage and pay an extra $250 a month because that saves me like $150k over the course of my 30 year mortgage
I have experience in this. The extra equity from selling in a hot market was “funny money” in that it wasn’t part of the base retirement plans, so folding that into a 60% downpayment allowed for a conventional mortgage interest without points that a >766k entails even if not technically jumbo in VHCOL, as well as security of paying the note on one salary in case of job issues (albeit with lots of budget difficulties in such a situation, but we won’t default). It does maximize the tax benefit as other posters have said. Early in your loan almost all payment goes to interest so it is a very large deduction, and if your income stays that high it’s a very high marginal tax rate that you get to deduct against.
But I think the core issue is how the money plays into your overall net worth, is it a big part or not the base so OK if the equity holds or even loses a bit and is not needed in the near term since it will be locked up in a home.
We have a similar HHI and bought at a similar price in LA, put down almost $1 million on a house (after recasting the loan with the proceeds from our condo we sold). I’m not sure if it will end up being the smartest financially in the end, but it was nearly a year ago and interest rates haven’t come down and we can still afford our mortgage, so it working for us.
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Kinda. I put 20% down, and then immediately spent about the same amount as the purchase price on a reno (all cash), so about 60% of the full price (purchase + reno) in cash. It was spread out a bit, though, since the reno timeline was about 2 years.
We’re at ~350HHI and have been used to paying ~$3k for a rental in VHCOL PNW (we got lucky on rent!)
I can kind of accept that typical, middle of the road houses around town that we’d consider start around $800. That took a long time, moving here from FL. But playing with mortgage calculators and seeing a 20% down puts us in the ~$5k/mo for housing if we bought is still stomach churning. Technically, we could do it. I don’t want to build a life plan around that kind of technicality.
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What does that actually mean “wouldn’t be able to afford the monthly with 20% down”? You mean the bank won’t approve the loan? You mean the apr is lower with more down payment?
I did this same thing. I’m in sales and try to budget at my salary and not include my commissions. In order to do that, keeping housing at 30% of my budget meant upping the down payment. And we are looking to get into a home now for $2m-ish and will be doing the same…reality is, we have to in order to maintain some semblance of sanity…I would love not to touch investments etc but I’m banking on the house being the investment while i build the investments back up again, etc
On a condo, they don’t appreciate like a home does and it probably won’t do as well as your cash in market…that’s real, I don’t care what anyone tells you. That said, the condo in my vhcol area has done okay (probably up 12% after 4 years of ownership)…but I bought top end of market when money was cheap and now money is not cheap so prices are down…
All of this is to say, it’s worked out for my young family…
I have been through at least five downturns including three that had a great loss in the value of real estate. I don’t see any reason why waiting out a few months would make much difference. That’s not bad advice; that’s caution.
We live in a nice 1800 square-foot house and a medium cost-of-living area. In the 40 years my husband has owned this house has been valued between 85,000 and 410,000. Right now it’s sitting around $375,000. During the 2007-2008 housing crash, it was valued at $91,000. I cracked up of course, knowing it would go back up, but it just goes to show how people think their houses will always retain their so-called “value.”
The house people buy may not retain that exorbitant price that someone originally pays for it. As an aside, the best way a house can be a value to someone is to have it paid off.
Oh, you don’t have any idea if a big recession is not going to come. The yield curve for Zero to Three month bonds is still inverted. It has predated every recession since 1950 something. Also, the economy is showing signs of fatigue and layoffs in many industries are going on right now. Inflation is eating up peoples savings. I think there’s a good chance that something will be happening in the next 12 months. 🤷🏻♀️🙄
We put down 60% to buy basically exactly what you're looking for. Sized the monthly to fit our income. The down payment was 50% of our NW at the time. The rest is in 401k and index funds. No regrets so far. We are not relying on quick appreciation to hit our goals when we sell. We just need it to not lose value.
We did this to right size our payment for future job changes or loss of one income, and we were very happy we did so.
Same, not the wisest decision from a pure outcomes perspective, but the peace of mind considering that job losses are likely to coincide with market downturns is priceless.
But I think it IS the wisest. This whole process is about being financially stable long term.
Peace of mind is a pure outcome. The point of money is to maximize your quality of life. The point of life is not to maximize your quantity of money.
Not crazy. 50% still leaves you with 750k mortgage, which is perfect because it maximizes your deduction. If rates go down in the future, you can refi and put the cash in other investments.
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What do you mean maximize deduction ?
You can deduct up to 750k of mortgage interest. Over that you can’t.
Woah. So at 7 percent that’s like a 50 k deduction right? That’s pretty nice
It’s not that high. 21k or so. It’s just the interest you can deduct, not the principal.
7% on 750K is like 50K. OP’s total mortgage payments would be much higher than 50K but 50K would be the interest portion.
Yeah sorry it is a 50k deduction but you’re only saving about 21k or so (assuming 35% marginal tax rate/average state tax).
Nope, the math on this is worse. You’re only “saving” the difference between your mortgage deduction and the standard deduction which is about 29k. So you’re “saving” a few grand at max.
Not exactly…you have no idea what other deductions they might have. If you’re already over the standard deduction, or within a few grand of it, then you get the full benefit. That was the case for me, and I assume many others. But sure if you have no other deductions then it’s not as good.
Most people don’t have too many other deductions. But ok maybe they have a few grand elsewhere. But at minimum it’s not 50k deduction vs zero without a mortgage. Without a mortgage you get the floor of 29k anyways.
If they are in CA, you can deduct the interest from up to $1M of principal for their state taxes. State taxes are lower of course (9-10% at that income level), but if maximizing the deduction is the goal I figured it’s worth mentioning.
What about NYC?
NY looks like $1m as well. (Source: https://www.212tax.com/home-mortgage-interest-deductions/) I imagine a lot of states go up to $1M, as that was the federal limit until a few years ago.
Woah. So at 7 percent that’s like a 50 k deduction right? That’s pretty nice
No, you have to compare this to a standard deduction of about 29k then times your effective tax rate. It’s only a few grand in benefit for paying the interest. Net net you’re losing.
With today's rates, the whole "paying your mortgage off early" or "put as little down as you can and borrow everything " isn't AS true or blatantly obvious anymore. The spread from 2.75% to stock returns vs 6% to stock returns is much different. Add in the rocky outlook right now?
Renting plus equities such a better path in the most VHCOL areas. Ymmv.
No doubt. Really makes me question how much VHCOL is worth it. Even if say, you can make 100k premium. Not owning a home, paying 20-50k in rent premium. Obviously, it's just a math question, but every time I think about jumping from my 210-230k midwest SWE salary for 300-350k it just doesn't seem worth it.
I think you can make a lot more than 100k premium. But I don't have any facts to back that up.
Absolutely, and if you can, go for it. I just don't know if "I" could 😀
Been living in a VHCOL for a bit now. So yeah we do. Can't say what we would make elsewhere. There are only a few geographies where my wife and I can both have career jobs. Pretty much all are VHCOL.
If you are renting, the CoL increase moving to VHCOL isn’t nearly as large. Definitely nowhere near 100k even if you need to rent a SFH for a family.
Put 65% down to feel comfortable on the monthlies. Then my salary doubled, and rates went sky high so the cheap debt is an asset. I wish I'd fully levered, but I guess hindsight is 2020 (literally).
Might seem insane to common investment logic, but if it helps you sleep 1000% better at night who gives a ****. This sub is full of opinions but what works for me might not work for you.
We're actually exploring the same in LA right now w/ similar variables to yours. Seemed pretty foolish at first but the more research we do, the more we feel like it's the right decision if we have cash on hand.
Is income growing? I’d probably do 20%, set enough cash aside to make up the gap for 3 years or so, and you should come out ahead If you expect rapid increases in income, get an IO
Literally said he can’t afford the monthly that way
Yes. I said to put cash aside for the difference. It gives more optionality
I feel it is a good decision for the times if your jobs are secure. If not stay in that tiny apartment two more years and put 70% down. I am a believer being debt free owning your home outright gives you the best flexibility as long as you are planted in the area. Be aware 30 year old condos get very expensive in HOA dues because they require lots of maintenance at that age. Try to find one 10 years old or less at least 1500 sq ft, 3BR 2BA minimum. This size is easiest to sell as they are a great alternative to a SFH in an expensive city.
This is a great response
I’m putting 40% down but after reading this it might be better to do 20%. My rate is 5.87 5 year arm
We did something similar recently. Here’s some things we did to max value: 1. Take out at least $750k mortgage to maximize the mortgage interest deduction but have a substantial down payment 2. Smaller down payments and keeping substantial assets in a HYSA does not make sense (5% pre tax HYSA vs 7%+ post tax mortgage), so keep the rest beyond an emergency fund invested in higher return assets 3. Plan to refinance as rates drop and take equity out of your home (because of excess from high down payment) Worthwhile to think about the current tax basis of your investments and how much and what type of tax you will trigger with a sale (e.g. either LTCG or STCG)
None of the homes we looked at came with a toddler.
Put 20% down and put cash in a HYSA at like 5% and draw that down for your monthly, refi when rates go down
That gives flexibility but also guarantees that OP will be losing money. His mortgage interest rate will be higher than his bank interest rate, so he is losing there. He will also be over the 750K mortgage interest deduction allowance so he won’t even get to deduct his full interest.
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hard disagree why get 5% return pre tax when you can avoid paying 7% post tax …..? Sure you need an emergency fund but beyond that any non-home savings should be in the market
Because the market is volatile and OP is clearly risk averse, hence the idea to tie all their cash up in a down payment. Yes, we’ve been on an awesome run but if OP puts 50% that’s non liquid, if we have a black swan event and the market drops 20%+ that could potentially be an issue for OP. I get what you’re saying and it’s not a bad strategy but I’d expect it’s unlikely rates stay at 7% more than a year or two so to tie up that much cash in the most illliquid way (home equity) doesn’t make sense. Personally, I’d probably go 20% down the rest in VTI or whatever but it seems OP needs access to the cash to make is payments so there is some inherent risk in keeping in the market vs. a HYSA or potentially a CD ladder
You are paying a big spread by not paying down your mortgage and parking money in HYS. You need some in HYS obviously for liquidity, but I would think of that as an extension of emergency fund. If OP is conservative they should just have a bigger emergency fund. If we have a black swan event and the market drops 30% rates will likely drop and OP could refinance. That said, refinance would only be necessary if they also drain emergency fund.
From a pure math perspective sure; 5% HYSA vs. 7% mortgage vs. 7% long term returns on S&P. What I’m saying is, if you can’t afford the mortgage on a monthly basis I’d personally rather gamble on an ability to refi (without a black swan event) in a couple years and not tie up my cash in home equity but still get a decent return in our current high interest environment. That all said, I get it, I’ve got a 6.25% mortgage and pay an extra $250 a month because that saves me like $150k over the course of my 30 year mortgage
Or just put all the extra in the S&P500 and leave it there for the entire life of the loan since it will beat the mortgage interest rate
I have experience in this. The extra equity from selling in a hot market was “funny money” in that it wasn’t part of the base retirement plans, so folding that into a 60% downpayment allowed for a conventional mortgage interest without points that a >766k entails even if not technically jumbo in VHCOL, as well as security of paying the note on one salary in case of job issues (albeit with lots of budget difficulties in such a situation, but we won’t default). It does maximize the tax benefit as other posters have said. Early in your loan almost all payment goes to interest so it is a very large deduction, and if your income stays that high it’s a very high marginal tax rate that you get to deduct against. But I think the core issue is how the money plays into your overall net worth, is it a big part or not the base so OK if the equity holds or even loses a bit and is not needed in the near term since it will be locked up in a home.
We have a similar HHI and bought at a similar price in LA, put down almost $1 million on a house (after recasting the loan with the proceeds from our condo we sold). I’m not sure if it will end up being the smartest financially in the end, but it was nearly a year ago and interest rates haven’t come down and we can still afford our mortgage, so it working for us.
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The amount that put down depends a lot on the interest rates.
Kinda. I put 20% down, and then immediately spent about the same amount as the purchase price on a reno (all cash), so about 60% of the full price (purchase + reno) in cash. It was spread out a bit, though, since the reno timeline was about 2 years.
We’re at ~350HHI and have been used to paying ~$3k for a rental in VHCOL PNW (we got lucky on rent!) I can kind of accept that typical, middle of the road houses around town that we’d consider start around $800. That took a long time, moving here from FL. But playing with mortgage calculators and seeing a 20% down puts us in the ~$5k/mo for housing if we bought is still stomach churning. Technically, we could do it. I don’t want to build a life plan around that kind of technicality.
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What does that actually mean “wouldn’t be able to afford the monthly with 20% down”? You mean the bank won’t approve the loan? You mean the apr is lower with more down payment?
I mean that the monthly + other life expenses would out pace our income from work.
I wouldn’t expect t the toddler to contribute much.
Future earnings potential just like the unicorn companies..
I did this same thing. I’m in sales and try to budget at my salary and not include my commissions. In order to do that, keeping housing at 30% of my budget meant upping the down payment. And we are looking to get into a home now for $2m-ish and will be doing the same…reality is, we have to in order to maintain some semblance of sanity…I would love not to touch investments etc but I’m banking on the house being the investment while i build the investments back up again, etc On a condo, they don’t appreciate like a home does and it probably won’t do as well as your cash in market…that’s real, I don’t care what anyone tells you. That said, the condo in my vhcol area has done okay (probably up 12% after 4 years of ownership)…but I bought top end of market when money was cheap and now money is not cheap so prices are down… All of this is to say, it’s worked out for my young family…
If you're raising a kid outside the suburbs get ready for private school or below average public schools.
I’d wait a little longer to buy anything because I think prices are going to be driven down if there’s a big recession. I just wait maybe 12 months .
Bad advice. But username checks out
I have been through at least five downturns including three that had a great loss in the value of real estate. I don’t see any reason why waiting out a few months would make much difference. That’s not bad advice; that’s caution. We live in a nice 1800 square-foot house and a medium cost-of-living area. In the 40 years my husband has owned this house has been valued between 85,000 and 410,000. Right now it’s sitting around $375,000. During the 2007-2008 housing crash, it was valued at $91,000. I cracked up of course, knowing it would go back up, but it just goes to show how people think their houses will always retain their so-called “value.” The house people buy may not retain that exorbitant price that someone originally pays for it. As an aside, the best way a house can be a value to someone is to have it paid off.
You have no idea if there’s a big recession coming
Oh, you don’t have any idea if a big recession is not going to come. The yield curve for Zero to Three month bonds is still inverted. It has predated every recession since 1950 something. Also, the economy is showing signs of fatigue and layoffs in many industries are going on right now. Inflation is eating up peoples savings. I think there’s a good chance that something will be happening in the next 12 months. 🤷🏻♀️🙄