How Much Should I Put Down?

When considering a home loan, learn how putting zero down can offer advantages.

by Diane St. James

Copyright © 2001

Want to buy a house but don't know how much to put down and how much to mortgage? This usually isn't a problem for most of us who are wondering if we will have enough to even cover closing costs. You might have enough if you can get Aunt Bea to give you a 'gift' for the down payment...or better yet your parents if they are just dying to finally stop tripping over your sneakers in the living room!

For those who ask me how much they should put down when they do actually have an option, I say as little as possible! "What?", they say. Yes, I suggest even borrowing 100% if possible. I only suggest this if you plan on staying in the home for a while so that when it comes time to sell, you don't have to owe money at the settlement table.

You can still avoid PMI financing by getting a first mortgage for 80% of the sales price, and a second mortgage for the remaining 20%. The rate on the second mortgage will undoubtedly be higher than the first mortgage and the term won't be 30 years, but you do avoid the PMI. You can't have your cake and eat it too.

There are 3 reasons why I recommend 100% financing when buying a home.

1. Potential Investment Earnings

If you can keep the money you would otherwise use as a down payment, in mutual funds or other investments that yield an average rate of return higher than that you are paying on your mortgages, you are coming out ahead. For example, many mutual funds (if kept long term) can have a rate of return of 10-15% or more over a 10 year span. If you are paying a combined average of 7.50% on your mortgages, you are still coming out ahead by approximately 2.50% or more. This can really add up over time. You have to think long term though, not short term as we all know how practically every fund value went way down within the last year. I am not a financial planner, but you can contact one or check out mutual funds yourself to see what investments may be best for you.

2. Tax Advantages

We are always looking for ways to pay Uncle Sam less and keep more in our pockets aren't we? When you have mortgage interest on a first and second mortgage you can use all the mortgage interest, up to 100% of the value of the home, in your Itemized Deductions on Schedule A of the Federal Tax Return. There is a limitation on the second mortgage interest. It is deductible up to a mortgage of $100,000. (Most of us don't have to worry about this maximum though.)

3. Other Expenses

When you borrow 100% of the sales price of a home, it frees up any money you do have left to be used for other things. After all, when you buy a home there are lots of other expenses. You may not be able to just stick the money you didn't use for a down payment into a mutual funds because you may want new furniture or just need furniture period. (Maybe it is time to move up from the milk crates and assembled cardboard dressers.) It is much better to use this money for major purchases than to rack up more debt buying things using your credit cards.

There are always those who feel more comfortable putting 10% or 20% down for the security of knowing they have some equity in their home. I'd rather see a nice pot of money worth perhaps 10%- 15% more at the end of 7-10 years. And by that time there will be some equity built up from just having home values increase over the years. Hey maybe, I can have my cake and eat it too!

- Diane St. James

Diane St. James is a mortgage professional with over 22 years experience. Her website http://www.abcmortgage.net exists to help educate people about the mortgage world. She is the author of 2 e-books, and has been quoted in the WALL STREET JOURNAL, on msn.com and appeared on national cable new television CNBC.