If someone could afford 100% down payment (or more) for a house, how much money should they put down?

Most websites that answer this question assume that the home buying is cash constrained and just buys as much house as they can afford. But what should a prospective buying do that could afford to pay cash for a house (or maybe more)? I would like to see a real analysis including the implications of stock market return vs. housing return, the value of leverage, the value of tax interest write offs (including the effects of AMT).

Also, is their an argument that a prospective home buyer keep some of their cash and buy a much larger (or more expensive house) than they need in order to take advantage of the leverage from borrowing money? For example, if the prospective buyer has $1m in cash and with their salary can afford a $1.5m home, should they put only $500k down on the house and buy a $2m or even $3m house to get the benefit of the appreciation through leverage? I have not seen any analysis like this on the Web.

Scott Asked by scottwharton 54 months ago Similar questions: afford 100% payment house money put Business > Financial Planning.

Similar questions: afford 100% payment house money put.

Leverage it If you can get a mortgage for a $1.5 million dollar house, that implies you're earning something on the order of $500k to $750k per year. So the AMT is a major issue here. It essentially eliminates the mortgage interest deduction, so you're paying the full rate on that money.So you can either put that $1 million into a house, or you can borrow a million on the house and put the other money in the market.

You can expect to earn 10% in the market. Since the mortgage is willing to loan you money at around 6%, it's clearly a deal to take that money and put it into the market. There are even more factors to consider, which make the calculation tricky: how much the house is likely to appreciate (or, especially in this market, depreciate), how long you intend to stay, etc. If the house is going to appreciate, it makes the case stronger.

If it's going to be worth half as much in ten years time when you go to sell it (a serious risk in homes that big right now, since the market for them is vastly increased by the overall rise in home prices and they'll suffer most) you'll be losing more than you can make in the market.(That's a loss of around 7% yearly, more than the 4% you're making off the leverage.) .

$, %, quality of life You raise an interesting question. Honestly if someone’s got $1M cash lying around, in addition to their income.. they probably Won’t want to buy a house in the $250K range! They’ll want something bigger, nicer, in a better neighborhood, in a good school district, with etc.Those types of things may be intangible but are definitely of Worth to any homeowner, and adds Value to the homeowners’ quality of life.

The rate of return question boils down to.. time value of money. How will your money perform "best" for you? So let’s say.. * $1M in stock market -earns say a 8%-17% return depending on aggressive grown vs blue chip funds -is more liquid -Some Risk to depending on aggressiveness of fund, and market performance -Tax Benefit: none * $1M Cash into a $1M house -earns 0% in the stock market -less liquid -Some Risk of market fluctuation -Greatest long term appreciation potential.

Location plays a major factor; historically higher in fast-growing affluent neighborhoods. -Appreciation can sometimes be +10% to +50% annually depending on the area’s Growth! -Tax benefit: property tax deduction (not much really) * Finance a $1M house @ say 5%-7% interest rate over 15-year term -Same benefits as above, depending on how much Down Payment.

-Tax Benefit: can Deduct mortgage interest paid + points & closing costs of loan -Less Risky than above, limited to your Down Payment. Bank takes part in the risk, but also takes interest. * Finance a $3M house @ similar interest %, but borrow more, maybe longer term.

-Same benefits as above. -Tax Benefit: can Deduct even more interest. -Risk: Bank assumes more risk, and charges you more interest -Even Greater long term appreciation potential.

-Intangible: greater enjoyment of a luxurious house? * $1M in the bank -earns only 5%-7% return in a high yield money market or CD -most liquid -NO risk. -Tax Benefit: none, unless some kind of tax-deferred ie.

IRA, 401K, etc. But those decrease liquidity.So I think it boils down to how you live, or want to live, and where and to what extent you want to Risk your money. Putting ALL of the $1M into the house means you "lose" the use of that Cash. But remember it *is* working for you since the house will be Appreciating at a rate greater than inflation.

Real estate has always been the best hedge against inflation. And by buying More house (ie. A $3M house), you’re getting even More appreciation potential.

Putting a Down Payment and Financing the rest of the house.. you use some of the money.. and since interest rates are still low.. you’re using someone else’s money for a relatively small fee. The rest of the money you can play in the stock market and earn a healthy return. You’re right though.. you don’t see many analysis because there are simply too many "what if" scenarios to run through!

And of course things change.. the stock market, real estate market, interest rates.. they’re all dynamic. Some questions that cannot be Analyzed with numbers.. -you can’t take all your money to the grave.. how will you enjoy it best while you’re living? -your estate will benefit your children, grandchildren, spouse, charity etc.After you die.

How much joy/karma does that give you? -do you want basic shelter? Or do you want luxurious accommodations?

How much will it improve you and your family’s enjoyment of life to live in a Nice house? -how will the house and neighborhood affect your children’s schooling, growth/development/educational potential, and quality of life? Sources: http://www.federalreserve.gov/general.htm .

This isn't that hard of a question, actually That leverage is a false impression. The entire argument is based on a qualitative impression that the more expensive house is 'better'. Sure, the more leverage you have the more house you can buy, but that doesn't mean it's quantitatively better.

Look, things like tax interest writeoffs never SAVE money, they just cost a bit less. You're still paying a very large amount of interest on a loan to get that writeoff, and the writeoff is only a percentage of the interest. Moreover, it may not even be available to somebody who can afford a $2.5M house.No amount of savings and kickbacks will ever justify the interest cost and debt service on a mortgage, so sure, you could buy a bigger house, but it's never more profitable to do this.

There are only two exceptions to this rule, both related to your points about appreciation. The first is whether that money would do better elsewhere. However, that has nothing to do with the house you live in, but rather with an analysis of whether you believe the housing market will outperform the stock market.

If anybody could actually predict that future they'd be billionaires, and certainly wouldn't share the secret. =) It's a judgment call, just like picking stocks. I've heard experts recently say the housing market is rolling over, while other experts say it's about to climb again!

Pick your expert and roll your dice. The second is whether the property itself will appreciate in value. But, again, this is nothing a generic analysis on the Web is ever going to show you - it's all about the property itself, its location, its comparables, and any work you plan to do on it.

I tend to get dinged for answers like this, but I call them as I see them. I believe it's impossible to produce a valid, quantitative analysis that supports these arguments in a generic fashion (i.e. Without taking into account ALL of the specifics of the properties in question, the exact amounts of cash involved, the prospective buyer's financial situation, etc. ) .

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I cant really gove you an answer,but what I can give you is a way to a solution, that is you have to find the anglde that you relate to or peaks your interest. A good paper is one that people get drawn into because it reaches them ln some way.As for me WW11 to me, I think of the holocaust and the effect it had on the survivors, their families and those who stood by and did nothing until it was too late.