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After you sell your house, you may well have some choices about the size of the down payment on your next home purchase. At a minimum, we recommend that you make a down payment of at least 20 percent of the purchase price of your next home. Why? Because that's the percentage that generally qualifies you for the best mortgage programs available.
What if you can make more than a 20-percent down payment? In that case, the real question is whether you can earn a high enough return investing that extra money in mutual funds, stocks, bonds, and so on to beat the cost of borrowing money on your mortgage.
Suppose that you get a quote for a fixed-rate mortgage that charges 7 percent in annual interest. Ask yourself whether you think that you can invest your extra cash and earn more than a 7 percent return (ignore the tax write-offs of mortgage interest because those are offset by the tax you'll owe on your investment profits). Invesing in bank accounts, money market funds, or quality bonds surely won't do the trick. To have the potential to earn a return that high, you must consider growth-oriented and riskier investments, such as stocks, investment real estate, or small business investments.
Younger homebuyers willing to take on more investment risk should lean toward a 20-percent down payment. Older homebuyers who tend to invest less aggressively should opt for larger down payments.
- Keep Copies of the Closing and Settlement Papers
- Keep Proof of Improvements and Prior Purchases
- Stash Your Cash in a Good Money Market Fund
- Double-check the Tax Rules for Excluding Tax on Profits
- Cast a Broad Net When You Consider Your Next Home
- Remember That Renting Can Be a Fine Strategy
- Reevaluate Your Personal Finances When Things Change
