My wife and I are looking to buy our forever home for $1.4 million – how much cash should we put down?

A Reddit user who is living in a $425,000 house is considering upgrading to a home that would cost $1.4 million.

He describes the home he wants to buy as a future “forever” home. However, he also wants to make sure he’s not making a financial mistake, and he isn’t certain how large the down payment should be.

So, is the Redditor in a good position to buy the lavish home of his dreams, and, if so, how much money should he put down?

Always run the numbers before buying a home

Before even getting to the question of how much money to put down, the first big issue is whether the home purchase is going to be affordable or not. No one should purchase a home if doing so is a financial stretch, and before anyone buys a property, they need to understand how it will fit into their budget and how the payments will impact their other financial goals. 

In this particular case, the Redditor said he and his wife are in their mid-30s with two children: A 5-year-old and a six-month-old. They have a combined household income of $380,000, which they each earn about half of, and they have rental properties that provide $40,000 in annual cash flow for them.

They spend $75K per year right now, but their expenses are going to increase by around $1,000 per month when their second child enters daycare. They also have $2.85 million in investments, not including $850,000 in investment real estate equity. The market value of their current home is $425,000, and they owe $110,000. They also have a car loan with a $600 monthly payment that they will be paying on for another 44 months. 

If they buy the $1.4 million home, he said they plan to put the equity from their current property toward it, along with another $300K in cash for a total of a $625,000 down payment. This would leave them with a $775,000 loan at 6.8% interest, so their total monthly payments when factoring in the mortgage, property tax, and insurance would be around $6,000 per month. 

Is this affordable, and is the down payment amount reasonable?

The first big question is whether the home would be affordable. It’s typically a good idea to keep your housing payment to no more than 30% of your income, and ideally closer to 25%. With a $6,000 monthly payment and their current income, the Redditor would be below this number with the couple’s earnings combined. 

However, while he doesn’t want to retire anytime soon, his wife wants to stop working in the next few years in order to be able to stay home with the kids. If that happens, then his plan to take on a $6,000 mortgage may not be an ideal one — especially since he’d be over that recommended ratio if household income gets cut in half and he’d have a large monthly payment to make on a single salary.

Of course, his investment account balance is also worth considering. If he and his wife were planning on drawing from their investment accounts to replace part of her salary — which he suggested they would — that changes things, and the payment may be affordable. Of course, he’d also be taking some money out of those investments to come up with the other $300K for the down payment — which is a big downside, since it means he’s tying up more cash in the home (an illiquid asset) and reducing his invested funds even as he begins to rely on them as a support source.

Some Redditors suggested he may be better off taking an alternative approach, like selling the investment property he currently owns and using the money from the sale, combined with the proceeds from the sale of his personal home, to pay cash for his forever house. That way, he would eliminate his housing payment entirely and be better able to cover his other expenses with his single income.

Other Redditors, however, cautioned against taking on such a huge obligation and increasing his expenses even while considering a big income drop — and many suggested they may have to choose between the big house and his wife becoming a stay-at-home parent.

Ultimately, the couple’s best bet is to talk with a financial advisor. An advisor can offer help in determining if the home purchase is affordable, how it will affect the wife’s plans to stop working, what their finances will look like over the long term in different scenarios, and what goals are most important to them. With this help, the couple can make a choice that makes good sense and that they hopefully won’t regret. 

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