Down Payments…Why less may be more

It pays to have a plan when you’re determining how much down payment you should use when you’re buying a home.   Often times, when families have sold a home and they have benefited from our local appreciation, they may have a significant amount of funds available (proceeds).   A typical reaction is to invest all of the funds from the house they’ve sold into their new home.   What’s wrong with this?  Nothing really…except if you want or need the cash back out, there’s now a cost and process to extract it (refinance or equity loan).

And consider this…your home equity does not earn any interestZero.  Instead, you could invest the funds that have gone towards your home equity into an interest bearing vehicle advised to you from your qualified financial planner.   

The more money you use for down payment, the more you’re reducing your tax deduction benefit of the acquisition mortgage as you are reducing your mortgage amount.  Your tax deduction on your mortgage is based on when you purchased your home, and obtained your "acquisition mortgage" to finance the purchase.   As you pay the mortgage down, this amount is reduced.   When you refinance, the balance just prior to the refinance is treated as the "acquisition debt" that is allowed to be deduct the interest from.   You are also currently allowed an additional $100,000 in home equity mortgage interest deductions.   You may want to consider having a larger mortgage balance when you purchase to establish a larger tax benefit.

Example, when you purchased your home 10 years ago, your mortgage was $180,000.   You’ve been making on time payments and the balance is now $150,000.  You refinance and have a new mortgage balance of $300,000.   The amount of interest you can deduct is based on a mortgage amount of $250,000 ($150,000 plus the $100,000 home equity allowance).  There may be other compensating factors and I am not a CPA, tax or financial planner.  Always consult with your trusted financial advisers.

Do you have debts (with no tax deduction benefit) that can be eliminated with proceeds?   Often times, the monthly money you free from eliminating a debt (such as credit or car payments) that once went to a payment is more than what the increase in the mortgage payment would be from trading the debt to a mortgage.

Example, if you have a car loan with a balance of $11,000 and a payment of $350, increasing your mortgage amount by $11,000 would provide an increase in your payment $67.73 per month (based on a 30 year fixed payment with a rate of 6.25%).   This frees up $282.27 a month, plus the interest on the mortgage is tax deductible, the auto loan is not.

Is your retirement or the kid’s college tuition funded?   How about the vacation home or investment property you’ve been contemplating?   Will you need some extra dough to make improvements to your new home?

My only point is for you to consider a strategy for your down payment before you automatically roll 100% of it over to your next home.   Plan up front so you don’t need me for a refinance too soon in the future…wait!!  I take it back. 


  1. Great advice! I’m always amazed at how clients will put so much effort into small investments and make no effort to understand the benefits of mortgage planning.

  2. Thanks, Keith. It almost seems to me that some consumers have a fear of their mortgage and just want that “beast” paid off and out of their lives as soon as possible…yet they have no problem having a car payment (with no tax advantage) or small return on another investment (like their 401k).

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