We make good incomes and just had our offer accepted on a $1.5 million home – how much money should we put down?

If you have a generous income and a good amount of savings, how much money should you put down when you purchase a house? A Reddit user is currently trying to make this decision. The original poster (OP) said that his household income was $620,000 last year and should be around $650,000 this year. He currently has a $2.2 million net worth, half of which is in retirement accounts and the rest of which is in brokerage accounts, as well as in savings accounts or cash so there are funds to cover emergencies and daily expenses. 

The OP said he had just had an offer accepted to buy a $1.5 million house. He’s now trying to figure out how large of a down payment to make, versus how big of a mortgage he should take out. Here’s what he needs to know to help him decide.

What size down payment is appropriate when buying a home?

The OP should seriously consider following the tried-and-true rule of putting 20% down on a home. A 20% down payment used to be the standard, although today many people put less down because they can’t afford to put down the full 20%. Since the OP can afford this much, there are some big benefits to the 20% down payment including the following:

• You can avoid private mortgage insurance, or PMI, which is required for homebuyers who make less than a 20% down payment
• You will have enough equity in the house that you are unlikely to end up underwater or owing more than the home is worth
• You can have your choice of lender, without being limited to only loan providers who are willing to work with buyers who have low down payments
• You’ll likely be offered a more competitive interest rate since your 20% down payment makes you a lower borrowing risk. 

For all of these reasons, it makes good sense for the OP to put down around $300k when he goes through with his home purchase.

Why doesn’t a larger down payment make sense?

The OP can actually afford to put down more than $300K, given that he has a $2.2 million net worth and could access some of that wealth to buy the home. However, he most likely shouldn’t put do that and instead should stick with the standard 20% down. 

It may seem odd to borrow more than needed, but there are good reasons to do so, including the following:

• The interest saved by getting a smaller mortgage is likely worth less than the amount your money could earn if it was invested in the market.
• Tying up too much of your wealth in real estate isn’t good for diversification especially since the money tied up in your home is hard to access if you need it.
• Mortgage interest is tax deductible for those who itemize, which makes getting a mortgage more affordable.
• A fixed-rate mortgage means your housing costs effectively get cheaper as you keep the same payment for 30 years but payments are made with money that is worth less due to inflation. 

For all of these reasons, putting down more than 20% rarely makes sense because you end up with a higher net worth if you invest the extra money in the market instead.  Of course, the OP may want to talk to a financial advisor to confirm what size down payment makes good sense for his individual financial situation, especially since mortgage rates remain pretty high right now. Getting professional advice could help to ensure he makes the best move as he moves forward with one of the biggest purchases of his life. 

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