 Is the down payment too big?
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 Dear
Dr. Don,
I just moved into a new home and put down $200,000. I am 38 years old. Should I be investing this money or letting it sit in home equity?
-- Jim Juncture
 Dear
Jim,
You do have this money invested. It's invested in real estate. Tapping
the equity in your home to invest elsewhere has you borrowing to
make those investments. At that point, the question is the same
as whether you should prepay your mortgage. Do you expect to earn
more on an after-tax basis on your other investments than you pay
after-tax on your mortgage?
Conservative investors have a hard time answering
yes to this question. Investing money in a CD or money market account
can earn over 5 percent pretax in the current interest rate environment,
but on an after-tax basis, the return is likely to be less than
4 percent. A 6.25 percent mortgage may have an effective rate, after
taxes of around 4.5 percent. Conservative investors are likely to
be better off prepaying the mortgage. I like the after-tax mortgage
interest rate calculator on the CCH
site to estimate your effective cost of mortgage debt.
For investors that are comfortable with the risks
associated with investing in stocks and bonds, the answer, based
on expected returns from these investments, is likely to be to invest.
These investors are comfortable with the ups and downs of market-based
returns and don't see the point in prepaying 4.5 percent money when
they could be investing and expect to earn 2 percent to 4 percent
more than that on an after-tax basis.
I don't know anything more about you than what you've written, and I don't know how expensive a house you purchased, but someone that puts $200,000 on the house is more likely than not to be in the conservative investor camp.
Keep in mind that effective rates on the mortgage
loan depend on whether you can use the mortgage interest deduction
on your taxes and the relationship of that deduction to the standard
deduction. A Bankrate feature, "2006
deduction amounts," has more on the standard deduction.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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