For most of us, the question of putting a large down payment on your next home purchase is not an option, however many of us are forced due to credit guidelines becoming more restrictive. Does it make sense to put a large amount down? What are the benefits and what are the negatives of paying a large down payment?
We will narrow our focus to those fortunate individuals with good enough credit to finance the majority of their next purchase and available a large amount for an optional down payment. Included in this group will be those that made eligible and maximum contributions to personal and business retirement plans, Roth IRAs, and have other financial goals well funded.
With the real estate market resetting back to a realistic valuation and more uncertainty in the financial markets, does it make sense to pay down on your real estate?
If you are paying a 30 year mortgage at 6% Interest rate, your tax equivalent borrowing rate is 4.8% (20% tax rate assumption), 4.2% (30% tax rate). Interest Rate X (1-Your Tax Rate) eg. 5% X (1-.30) = 3.5% Effective Borrowing Cost.
Can you reach this 3.5% rate of return elsewhere? While it is more than your average 2% Certificate of Deposit,historically CDs have yielded around 5%. Better than 3.5%. Will the markets stay flat and real estate values increase with inflation? Or will market averages prevail?
If you ask me what would I do, I would explain that I am waiting to refinance our home once rates improve. We need to pay to live somewhere and a primary residence should not be seen as a vehicle to achieve wealth.
Ryan Richmond is a fee based financial planner and private equity investor from metro Detroit. He has a background in personal, small to mid sized business, family trust and estate planning. In addition, Mr. Richmond has been involved with all aspects of residential and commercial real estate spanning two generations.
