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First Time Dallas Home Buyers: Lower The Interest Rate, Higher The Down Payment

Posted on April 8th, 2009 6:21pm by Candy Evans
Filed under interest rate cuts

My kids are buying a home, their first home. They are pre-approved for a mortgage through USAA: 4% for 30 years, but USAA wants 20% down for this conforming loan. Question: while that seems like a great rate, is it wise to put so much down? My advice, which may be bad, was to get a slightly higher interest rate and put less down. They need the tax deduction, and while they have saved up enough for a down payment, I feel like 20% is a lot.

Is Mom giving out bad advice? And what kind of rates are you seeing out there?

5 Comments to “First Time Dallas Home Buyers: Lower The Interest Rate, Higher The Down Payment”

BP @ April 8th, 2009 at 7:56 pm

I understand the desire to preserve cash, since cash is king in this economy.
I don’t think it’s bad advice, but be sure and use that cash to buy bottled water, canned goods, and gas masks for the doomsday scenarios
I think it very much depends on an individual’s situation…if a person has steady income and decent job security, making a large downpayment doesn’t seem so bad – BUT if your income varies month-to-month, I would say preserve the cash.
N @ April 9th, 2009 at 11:50 am

It’s sensible advice. If they get a loan at 5 or even 6% with 10% down instead, they are still getting a pretty good rate without losing all their cash. Plus they may need the cash for the initial new home expenses. Furniture, kitchen, bathroom, garage, etc.

Had I realized how much all those basic necessities cost, I would not have put down 20% on my mortgage, or at least sought a lower priced home to buy.

On that subject, I need to sell my Knox-Henderson condo because of a relocation for a new job. I will have it listed soon, after I meet with a realtor this weekend.
BF @ April 9th, 2009 at 8:38 pm

How many points are they paying to get a 4% loan? Or were you just rounding WAY down from the 4.625% range?

If they are buying a home that they can raise kids in, then great. But if they are buying a starter home like many newlyweds, paying points to drop the rate on a 30-year mortgage seems like a waste.
Neal L @ April 9th, 2009 at 8:50 pm

“They need the tax deduction” — let’s think about that… Suppose the home is $100,000 and the interest rate is 4%. Assuming the kids are in the 25% tax bracket, that means the deduction is worth $1,000 bucks. But to get that $1,000 THEY HAVE TO SPEND $4,000!!!

There are two types of people in this world – people who pay interest and people who collect it. Taking debt – especially more than you need – puts you in the former.
bc @ April 10th, 2009 at 1:18 pm

I’m with Neal here – I hate paying interest when I don’t have to. In years past, we’d use the excuse that we can get a better return on the extra cash in the market and could live with 5-6% interest on the house, but that’s no longer the case every time.

We’re getting our first big tax return this year thanks to the wife starting up her own business and the interest payments on our 30 year home loan (in the 3rd year, currently @ 6.45% when you combine the two loans – we put down 5%), but I’ve decided to forego the minor tax breaks for the $160k in saved interest over the life of my loan by refinancing to a single 15 year 4.625% loan – since the value of the house is about 18.5% more than when we purchased it and we can slide in under the 80% rule.

Am I out more cash each month? Yes, about $260. I’m basically putting that into equity rather than spending more on interest and blowing the difference of refinancing down to a 30 year payment on stocks, booze, vacations, whatever. I don’t think $260 is putting all your eggs in one basket because I can still invest other monies in cheap stocks.

The difference between our situation and most others is that we bought a $186,000 house and did a lot of improvements and are happy with 1582 square feet. The majority of the folks in our fair city need 4,000 sq ft (on the small side) to live comfortably. When you live on the small side, 20% down and 15 year loans are easy. When I’m done with this house in 5-7 years, I’ll be ready to rent it out and buy a bigger house (if I so desire) with 30-40% down.

Debt is for suckers.