• "Spreading the ideas of freedom loving people on matters regarding metals, finance, politics, government and many other topics"

a new scam by the numbers,

Scorpio

для продажи слегка подержанный
Founding Member
Board Elder
GIM Hall Of Fame
Joined
Mar 25, 2010
Messages
33,659
Reaction score
55,214
spin the wheel!
step right up and take your chance to win, and win big!

a whole lot of grandiose assumptions made in this little math problem,



This One Chart Shows Why Putting 20% Down on a Mortgage May Be a Mistake​


Patrick Villanova
Thu, October 14, 2021, 3:33 PM


What's a better financial move: putting 20% down on a house or 10% and investing the rest?
What's a better financial move: putting 20% down on a house or 10% and investing the rest?
When you put 20% down on the purchase of a home, you don’t have to borrow as much money as someone whose down payment is only 5% or 10%. And as a result, your monthly mortgage payment may be considerably lower. But 20% down payments, while common, are by no means mandatory or the norm. In fact, the National Association of Realtors says the median down payment in 2020 was just 12%. So if you are hoping to save for retirement in addition to buying a home, you could opt for a 10% down payment and invest the remaining cash. Your monthly payments and interest will be higher, but your invested assets will grow into a substantial nest egg over the next 30 years. Let’s compare how a 10% and 20% down payments could affect your retirement.
If you need to figure out how big your down payment should be, a financial advisor may be able to help you decide.
Parameters of Our Comparison


There are several parameters that we’ll base our analysis on. First, the median sales price of a home in the United States is currently $374,900, but we’ll use a $375,000 property for simplicity’s sake. In both scenarios below we’ll assume you have $75,000 in cash for a down payment and/or investing.
Next, we’ll assume a 3% interest rate for the mortgage, which is more or less the current national average. Our analysis also won’t include property taxes or homeowner’s insurance, but it will include private mortgage insurance. This surcharge, known as PMI, will apply to the mortgage that uses a 10% down payment.
Lastly, we’ll assume that any hypothetical money invested in the stock market will average a 10% annual rate of return, since that’s the approximate historical average of the stock market. We’ll also assume monthly compounding.
On the outset, if you just consider costs over time, it may seem that the 20% down option is the winner, as shown in the comparison chart below. But it’s more nuanced a decision than that.

Option 1: Put Down the Full 20%
By opting for a 20% down payment ($75,000), you will pay less in interest and avoid PMI, resulting in lower monthly payments. After 30 years of making regular monthly payments, you will have spent a total of $530,089 (remember, this excludes property taxes and homeowner’s insurance).
See the breakdown below:
30-Year Outlook for 20% Down Payment Home Price Down Payment Loan Amount Monthly Payment Total PMI Paid Interest Paid Over 30 Years Total Investment $375,000 $75,000 $300,000 $1,265 $0 $155,089 $530,089 Option 2: Put 10% Down and Invest the Rest
What's a better financial move: putting 20% down on a house or 10% and investing the rest?
What's a better financial move: putting 20% down on a house or 10% and investing the rest?
Putting 10% down on a $375,000 home means taking out a larger mortgage ($337,500) and also paying $175 per month in PMI. The PMI payments will eventually end, but they will total more than $10,000. After 30 years of making regular monthly payments, you will have spent a total of $559,994.
See the breakdown below:
Cost of Mortgage With 10% Down Payment Home Price Down Payment Loan Amount Monthly Payment Total PMI Paid Interest Paid Over 30 Years Total Investment $375,000 $37,500 $337,500 $1,598 $10,519 $174,475 $559,994
By putting 10% down instead of 20%, you’ll have an extra $37,500 to invest in the stock market. Here’s a look at how that money could grow over a 30-year period (the SmartAsset Investment Calculator compounds interest monthly):
Retirement Savings Principal Investment Monthly Contributions Term Total $37,500 $0 30 years $743,902
Even without making monthly contributions to your brokerage account, putting 10% down and investing the remaining $37,500 will result in a sizable nest egg by the time your mortgage is fully paid. Assuming a 10% annual rate of return, the $37,500 would grow to $743,902 after 30 years. It’s important to note that while this hypothetical 10% rate of return is based on historical average of the S&P 500, investment returns have been even more robust in recent years. In fact, the benchmark’s total returns have exceeded 11% in nine of the last 12 years, including 31.5% in 2019.
Below, you can see another way of comparing the two scenarios. Yes, the smaller down payment of 10% means the mortgage ultimately costs you more over the life of the loan – about $30,000 more, between PMI and higher mortgage payments. But if the $37,500 you put in the stock market grows at the historic average of 10% per year, it will turn into nearly $750,000 by the time you finish paying off your mortgage. While both of these scenarios end with a fully paid-off house, of course, the person who chose to invest half the down payment ends up with more money in his investment account than he ultimately paid for the home.

The Verdict
The answer appears fairly obvious. Putting 10% down and investing the remaining 10% seems a far better financial move in the long run than putting 20% down, right? Not so fast.
While the 20% down payment will result in less interest paid over the life of the mortgage, it also will also mean lower monthly payments ($333 less per month). Rather than spend that extra money, a shrewd investor would use it to build their retirement nest egg. Investing $333 each month would leave you with a whopping $752,742 after 30 years, assuming the same 10% average rate of return. Not only would you save $30,000 in interest and PMI by putting 20% down versus 10%, you would amass an even larger nest egg by investing your monthly savings.
So that settles it, right? Not exactly.
There’s an even savvier option. While putting less than 10% down would leave you paying PMI each month, that surcharge would presumably disappear once you’ve paid the equivalent of your 20% down payment. In our example, your monthly PMI would be $175. After approximately five years of making monthly payments, you would reach the 20% equity threshold and PMI would disappear, leaving you with an extra $175 every month.
At this point, your initial $37,500 investment would have grown to $61,699 in the market. Contributing the $175 that you were using to pay PMI each month would supercharge your savings, helping it grow to $976,097 by the time the mortgage is paid off. Even though your mortgage would cost you an extra $30,000, this option nets nearly $1 million in retirement savings, by far the largest net egg.
Bottom Line
What's a better financial move: putting 20% down on a house or 10% and investing the rest?
What's a better financial move: putting 20% down on a house or 10% and investing the rest?
Buying a home and saving for retirement don’t need to be mutually exclusive. Whether you choose to make a 20% down payment or put 10% down, there are ways to invest extra cash. In both scenarios, consistently investing money that would otherwise pay for PMI has a huge impact in the long run. The best option we found is to put 10% down, invest the remaining cash and then contribute $175 to your brokerage account each month once PMI is paid off.
Homebuying Tips
  • Need a mortgage and don’t know where to start your search? SmartAsset can help you find a mortgage rate based on where you’re looking to buy a home, your budget and other factors. Get started now.
  • A financial advisor can help guide you through major financial decisions, like buying a home. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Photo credit: ©iStock.com/Jamakosy, ©iStock.com/pinkomelet, ©iStock.com/dragana991

 

the_shootist

Mother Lode Found
Sr Midas Sup +++
Mother Lode
Joined
May 31, 2015
Messages
73,511
Reaction score
157,203
At today's prices home ownership is for the rich only (or those who don't mind going $1M+ into debt)

Thanks Obama Xiden!
 

Ensoniq

Midas Member
Midas Member
Sr Midas Sup +++
Joined
Apr 9, 2013
Messages
11,787
Reaction score
26,705
Location
North Carolina
Debt is risk to me. Call me inconsistent but I wont use debt for personal transactions anymore. Previously i tried for large down payment and prepayments to minimize interest or skip payments and buy outright.

In business it’s different, as long as cash flow positive and enough runway to ride out the peaks and valleys, then ok to leverage. If it blows up, it’s the business not my personal finances. Not advocating outsized risks every deal has to make sense and meet ROI policy.

Shorting your down payment to invest in the market is unnecessary risk
 
Last edited:

chieftain

Trump got them plump
Gold Chaser
Joined
Jan 4, 2020
Messages
5,191
Reaction score
8,778
There isn't an investment that will give an annual 10% return year in year out in the current climate.
 

Usury

Site Supporter
Site Supporter
Platinum Bling
Joined
Apr 1, 2010
Messages
5,051
Reaction score
4,826
Avoiding mortgage insurance by going to 20% is a bigger deal than this article makes out (in my opinion anyway).
Not really….PMI has gotten really cheap and isn’t all that much with 10% down. Heck you can even prepay it for 1% or less in many cases and be done forever. 1% divided over the loan term is a pittance.

Having said that I’d always pay off debt before investing. You’re getting a GUARANTEED return by paying off debt. And as chief pointed out their projections don’t seem realistic.
 

Usury

Site Supporter
Site Supporter
Platinum Bling
Joined
Apr 1, 2010
Messages
5,051
Reaction score
4,826
Also most buyers don’t even have 10% to put down, so this is all moot. Most buyers I see with any significant down payment only have it because they have inflated equity in the house they’re selling. In parts of commiefornia that’s the only way any average person can buy a million+ dollar home…using the $700k in equity in their current home they’re selling and financing 300k.
 

dacrunch

Midas Member
Midas Member
Joined
Apr 9, 2010
Messages
10,079
Reaction score
15,827
Like in real life, a home-buyer will "find and set aside his monthly $300 savings" to "place into investments"...??? !!! Like that would happen! Right!

And like those "investments" would give an annualized 10% compounded over 30 years...??? !!! Like that would happen! Right!

I gave each of my adult kids with families $100k for downpayments (30% house in fine shape & 40% house needing tlc) on houses they otherwise NEVER could have bought... And they struggle anyways to come up with their monthly housing costs, and don't have "$300/month extra looking for a place to invest it"... With a smaller downpayment, they'd be looking at a foreclosure in hard times...
 
Last edited:

Cigarlover

Midas Member
Midas Member
Midas Supporter
Survivor
Joined
Dec 18, 2011
Messages
10,398
Reaction score
21,791
There isn't an investment that will give an annual 10% return year in year out in the current climate.
That caught my eye as well. State pension funds are all screwed because they were told they could make projections based on a 7% annual return. Most of the time they are lucky to get 1-3%.
 

dacrunch

Midas Member
Midas Member
Joined
Apr 9, 2010
Messages
10,079
Reaction score
15,827
I notice that the OP article has NO "likes" (yet) ;)

We're a fiscally conservative bunch, here...
 

Someone_else

Platinum Bling
Platinum Bling
Midas Supporter ++
Joined
Mar 31, 2010
Messages
4,148
Reaction score
6,642
Lastly, we’ll assume that any hypothetical money invested in the stock market will average a 10% annual rate of return,
Any arithmetic that starts with bullshit will give a bullshit answer. "Past performance is no guarantee of future results."

I don't see that the author factored in inflation. Inflation waters down your stock market "gains". So subtract that out. Inflation makes your future house payments less expensive. So factor that into the actual mortgage cost. As Usury noted, paying off a debt is a guaranteed savings in interest.
 

dacrunch

Midas Member
Midas Member
Joined
Apr 9, 2010
Messages
10,079
Reaction score
15,827
Any arithmetic that starts with bullshit will give a bullshit answer. "Past performance is no guarantee of future results."

I don't see that the author factored in inflation. Inflation waters down your stock market "gains". So subtract that out. Inflation makes your future house payments less expensive. So factor that into the actual mortgage cost. As Usury noted, paying off a debt is a guaranteed savings in interest.

And up 'til now, no capital gains taxes on the sale of your personal dwelling.... (that just might change with Xiden though)... but plenty of "tax consequences" with "investments"...
 

Irons

Outlaw Prospector
Midas Supporter
GIM Hall Of Fame
Survivor
Joined
Mar 30, 2010
Messages
32,513
Reaction score
66,897
It's almost as if the stock market dope pushers are losing addicts and need to lure in more to rob.
People paying off their houses and then reducing debt even further with money not being put on a mortgage really fucks up the bankers plans.


..
 

edsl48

Midas Member
Midas Member
Midas Supporter
Survivor
Joined
Apr 2, 2010
Messages
4,190
Reaction score
8,995
Last time I borrowed to buy a piece of real estate I simply put up securities to cover the loan. That way I paid no credit check fee, points, appraisal fees, etc etc etc. I also did not pay the capital gains taxes that I woud have incurred had I have sold the securities to make the purchase. This option is often overlooked by individuals that the bankers never seem to mention because it doesn't generate fees that they steer to their buddies.