Housing Down payment question

The answer is "it depends." Opportunity cost is the name of the game here.

Funding Fee.

• If this is your first VA loan, then the funding fee is 2.15% of the loan amount that is added back into the loan (this is in addition to normal closing costs). So, if you take a $365,000 loan, you'll be looking at a 2.15% funding fee ($7847.50), for a total loan of $372,847.50. The interest rate is usually low enough that it's still worth doing it, but you should be aware of it.
• If you put down 5%, the funding fee is 1.5%. If you put down 10% or more, then it's 1.25%.
• If you have at least 10% VA disability, then there is no funding fee.

Monthly Payments.

The key is that you want to balance cash out of pocket with monthly mortgage payments. Obviously, making a down payment reduces your loan amount which makes your payments smaller - but to do so you had to pay a significant amount of money out of pocket. Let's compare (All payments here are 30 year fixed loans, and do not include escrows like property tax, insurance, and HOA):

• 0% Down, full fee: $0 down, $372848 loan at 3.25%: $1623/mo
• 5% Down: $18,250 down, $351951 loan, 3.25%: $1532/mo
• 10% Down: $36,500 down, $332,606 loan, 3.25%: $1448/mo
• 0% down, 10%+ VA Disability: $0 down, $365,000, 3.25%: $1589/mo

Okay, so let's compare payments:

• 5% down will save you $90/mo but cost you $18,250 down. You'll earn that down payment back after (18250/90=) 202 months, or roughly 17 years.
• 10% down will save you $175/mo for $36,500 down. Payback period of 208 months.
• The payback period is even long if you have no funding fee - the savings change to $56/mo and $140/mo, for payback periods of 325 mo and 261 mo.

So bottom line, putting down a down payment is not worth it from the standpoint of payment savings - it'll take you at least 17 years (or more) to recoup that down payment - and that down payment sits as dead money in your house, instead of growing in your investment accounts.

There are two other arguments for a down payment:

Savings on PMI.

With conventional and FHA loans, you get better terms on PMI with higher down payments. That obviously doesn't apply here, so let's move on. (Note that this is the primary reason you should put down a higher down payment on non-VA loans - the idea that you want equity in the house is a little misguided, as we get to below)

Equity.

There is a common misconception here. The "conventional wisdom" says that you should put down a downpayment, because if you sell the house early or the value drops, you want to have a buffer before you start losing. This is misguided. A lack of equity is ONLY dangerous if you don't actually have any money that you can pay in the event that you need to. For example, if you had $0 in investment accounts, I would think twice about putting $0 down. If you have the money to make a 20% down payment, it's better to keep that invested in other accounts, and make as low a down payment as possible. Here's why:

• Being upside down on a house only matter when you sell. If it's a long term home, then it doesn't matter what happens to values - the payment remains the same regardless of current market values, so it's not like losing value suddenly makes it hard for you to afford to keep the house. Now, if you lost your job, that would be a different story, but that would still be independent of how much you bought the house for.

• If you are underwater on a house when you sell, you're losing money, down payment or not. For example, let's say you buy a $300,000 house. You have $60,000 and can either put that all down, or keep it in your 401k. Let's say that 2 years from now, you have to sell, but you can only get $260,000 for it. In addition, let's say that you incur 10% in costs to sell the house - 3% to your agent, 3% to the buyer's agent, and 4% for repairs and concessions to the buyer (just hypothetical here). So, you bought a house for $300,000, are selling it for $260,000, and deducting $26,000 from that to sell the house, leaving you with a net of $234,000. Let's see what happens:

• 20% Down. You followed the "conventional wisdom" and put down $60,000 and took a $240,000 loan. After 2 years, you're down to $230,600. When you sell the house, you get $260,000 minus $26,000 (selling costs) minus $230,600 (loan balance) = $3,400 back at closing. In reality, you paid in $60,000 down + $25,068 in monthly mortgage payments, and got back $3,400. This house cost you $81,668 for the 2 years that you lived there. That loss in home value hurts you no matter how much down you put. Let's go to the zero down option:

• Let's say you put $0 down. Instead, you keep that $60k in the stock market and it grows at 5% a year (let's keep it conservative). So, you take a $300,000 loan, and the same thing - after 2 years, you owe $288,300, sell for $260k, subtract $26k for costs, leaving you with a net of $234k. In order to come up with the difference, you have to withdraw that cash from your retirement account (which you would have done at the beginning if you were making a down payment). However, that $60k was growing over two years, 5% a year. So, when you withdraw it, that $60k has turned into $66150.

• Your net is $260000 - $26000(selling costs) - $288300 = $54,300 in the hole. So, your cost of living was $54,300, plus $31,335 in mortgage payments, minus the $6,150 that your $60k earned in your stock accounts, for a total cost of $79,485 for two years.

In this example, you actually saved money by putting less money down. This is the key that people forget - being underwater on a house only matters when you sell and if you didn't have the money to put down in the first place.

You would be screwed if you put $0 down, but didn't have any money available for a down payment in the first place. In that case, you'd either have to stay in the house, or rent it out until the value rose (or your balance dropped) enough that you'd be able to pay everything off.

Of course, this is all a moot point if the house rises in value - so it will depend on your area, as well.

I hope this helps a little!

You should put down 10 percent to reduce the funding fee on the VA loan, unless you are qualified for a no funding fee loan thru VA. If you search for u/vetbanker posts, he gives tons of great advices on what to do with various down-payment for VA loans.

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