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 Dear
Steve,
I am buying a home worth $300,000. Due to a sale of a prior home, I have $200,000 to put down as a down payment. Is this advisable?
-- Lenore
 Dear
Lenore,
To most home buyers, a home is a shelter first
and an investment second, and that's how it ought
to be. There's no reason, though, you can't take
an investor's perspective on your upcoming home
purchase. That means asking yourself this: Where
will that $200,000 burning a hole in my pocket
give me the most mileage and flexibility? At present,
it might not be the housing market. Not that a
home isn't a good long-term investment. Homeownership,
after all, creates the only significant nest egg
many American homeowners will build in their lifetimes.
At this juncture, however, value
appreciation is iffy in most markets, at least
in the near term. Even if you plan to stay put
awhile in your new home, you might opt to keep
most of your money in a more liquid safe haven
in case you need to access it fast for any number
of emergencies that life can throw at you. Keeping
cash at hand will give you breathing room not
only for contingencies, but for home improvements,
travel and any number of wants and needs.
In a nutshell, if the rate of return
on your investment exceeds the mortgage rate you'll
be paying, borrowing a larger amount actually
puts you ahead of the game. Diversified stock
investments, mutual funds or bonds can offer such
reasonable returns, but they aren't nearly as
safe as CDs, government bonds or those good old-fashioned
FDIC-insured, interest-bearing savings accounts.
There is another side benefit if you opt for a more conventional mortgage arrangement: the mortgage-interest tax deduction. However, as a seasoned homeowner, you already know it's not the dollar-for-dollar return that many people think it is. Those who fall into the middle salary range will likely get between 25 and 30 cents back on every dollar they've paid in interest -- not bad, but not a windfall.
If you still want to plunk down that wad of cash, you will
probably have little problem getting a chunk of
it back out by borrowing against the place. Paying
that much in cash also means you'll have to jump
through fewer hoops to meet loan-eligibility requirements.
But -- and this is a big "but" -- if
you're retired or unemployed it might be difficult
getting a home equity loan or second mortgage
without a steady income.
This kind of decision is not one
to be taken lightly. Before you do anything, consult
with a Certified Financial Planner, registered
financial adviser or other qualified, licensed
professional who can sketch out your options and
the inherent risks and returns. Personally, I'd
opt for a safer investment in this dicey part
of the market cycle. But you may be one of those
folks who simply feels more secure having no mortgage
payments or low mortgage payments.
Good luck with your new home!
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