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Real estate editor Maryann Haggerty and columnist Elizabeth Razzi respond to a question adapted from a recent online chat.
Q 20 percent down? We've been saving for five years and are ready to buy a townhouse in Northern Virginia or Montgomery County. We have $100,000 for the down payment. Should we put down the whole 20 percent on a $500,000 townhouse or only 10 or 15 percent? We can qualify for the loan either way.
A Elizabeth Razzi: This a financial planning question as much as it is a real estate question. You have to look at what else you might do with the $50,000 or $75,000 if you choose not to put it into your down payment. If there are big bills for children's college tuition in your future, or if you need to play catch-up on your retirement savings, you could be better off investing that cash. But if you dream of a mortgage-free retirement, you can get a jump on that goal by making a bigger down payment now.
Maryann Haggerty: With 20 percent down, you avoid the whole question of private mortgage insurance vs. a piggyback loan. PMI protects your lender if you have less than 20 percent equity in a house. It can add significantly to the monthly cost of the loan. A piggyback loan avoids PMI by combining a first mortgage with a higher-rate second mortgage. Piggybacks were very popular during the boom market. However, these are exactly the kinds of loans that are causing lenders so many problems now.
Whatever you decide, make sure it leaves you cash for emergencies.
E.R.: Ask a loan officer to show you the monthly costs of owning that home under all three down payment scenarios, 10 percent, 15 percent and 20 percent. Could you afford the higher monthly mortgage payments, including mortgage insurance, if you take the larger loan? If your budget would be too tight, you have your answer right there.
The next Real Estate Live chat will be at 1 p.m. Friday.
