Q. Is it monetarily beneficial to make a small down payment on a house even if one has the capital to make more than the minimum amount required? Also, two years after having purchased a $90,000 house with a $30,000 down payment does it make sense for me to pay off the entire remaining mortgage?I have the money and am interested in eliminating the monthly interest and principal payments. I am in the 33 percent tax bracket. The interest charges will be about three times the balance of the mortgage, and I am only entitled to deduct one-third of the total payments. Please advise.
*A. This question has two answers. The first could be categorized as the emotional response, and the second as the mathematical.
On the emotional level, all of us would like to have our house free and clear of any outstanding mortgage. Those who recall the Great Depression are especially concerned about losing their job and not having enough money to make mortgage payments. And lenders often are unconcerned about the human element involved in these mortgage lending procedures and will foreclose on property.
Clearly, this emotional response has to be taken into consideration in any determination of how much equity one should have in one's property.
No one wants to lose what may be their most valuable asset. If there is a mortgage on your property, regardless of size, a lender can take your house away from you if you cannot make the monthly payment.
Now let's look at the mathematical issue. First, it clearly does not make sense to borrow $60,000 at 11 to 12 percent merely to have that same amount of money sitting in your bank account drawing interest at 7 or 8 percent. The interest income is taxable at your tax rate, while of course the interest expense on your mortgage also is deductible at your tax rate.
As we all know, lawyers often like to answer a question with another question. So to answer your question, I have to ask you the following: First, what do you intend to do with the $60,000 you currently have in your savings account? Do you want to use it for other investments, to improve the property, to buy clothing, take vacations or any other such purposes? There is merit in having some money put away for that "rainy day."
You also must analyze the numbers carefully. In your example, you are paying 12 percent interest on a $60,000 mortgage. You are receiving 8 percent interest on the $60,000 sitting in your bank account. The interest income is $4,800 per year and the interest expense is approximately $7,200. This is a yearly, pre-tax out-of-pocket expense of about $2,400.
How significant is this to you? If you are relatively secure in your job, then you may want to have a high mortgage and leave the money in the bank for that rainy day.
My personal opinion is that one should have as little equity in the property as possible. Your house will no doubt go up in value, conservatively speaking, between 5 and 7 percent per year. It will increase in value whether you have $30,000 in equity or $90,000. Thus, the equity you have in your property is in reality "dead money." It is not earning anything for you.
However, you must weigh the emotional arguments against the numerical arguments. Some of us may be more concerned about our future stability than others.
I have not answered your question. In effect, there is no general answer that can be given. Authors and columnists have written numerous articles and books on this subject. But each of us is different.
We have our own needs, concerns and desires.
What you have to do is evaluate all of the relevant factors before making your decision.
As I have indicated, these factors include:
*What other uses will you make with your money?
*How secure is your job?
*Are you concerned about another depression? Do the interest deductions compensate for the additional mortgage payments that you will make?
Clearly, a great majority of Americans want to be able to continue the interest deduction. Even President Reagan's current tax proposal now moving around in Congress has preserved the homeowners' deductions for all Americans. But you are not a statistic. Only you can determine what is best for you.