How much down payment for new house construction?

7 years ago

I am a first time home buyer and I am financially able to afford 75% of the price. I am also able to get a loan with 20% down payment as well. What are the pros and cons besides the lower monthly mortgage payment with significant down payment? I know that mortgage interest can be deducted but I don't see any calculators that will help determine if taking a bigger loan is a good thing in the long run. I would like to balance the down payment with the need to save for kids college, retirement, etc.

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B Carey

7 years ago

Even though interest rates are at their highest point in about 7 years, they are still so historically low. With the new tax laws, fewer people will choose to itemize (where you can deduct mortgage interest) rather than take the standard deduction.

Many in the finance industry would tell you to leverage your house so the rest of the funds could be put into investments. Yes, if you take a loan out for 25% of the purchase price, you will have a very small payment. But if you can afford your house payment, you should still be achieving other financial goals. In figuring out the house you can afford, it would be wise to already be maxing out your retirement accounts. (Although very few people do this).

Everyone has different financial goals. What are yours? Does taking out an 80% mortgage loan help you achieve those better?

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Comments (7)

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Virgil Carter Fine Art
7 years ago
Sounds like you may be early in your family life. You will need to analyze your cash flow requirements versus savings requirements.

Bry911 should be along for some expert financial advice...
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User
7 years ago
When you are younger, time can work in your favor. I tend to agree with B Carey above.
Laurie Schrader
7 years ago
last modified: 7 years ago
In my area, construction loans are different from mortgages. Can be bundled, and they eventually roll over- at a cost. All of it matters, for one who has multiple needs to put all the $$.

What are you really looking at? Paying X percent on construction. Take that, multiply it by the number of months you'll be in construction. That's a cost, and I don't know how it "plays" in your market- whether or not it makes financial sense.

Construction-to-finance loans often carry their own costs- closing etc. Calculate it all in.

Is your home likely to appreciate enough to make it all pencil out?
shivece
7 years ago
You have reached the point where you need a good financial advisor. Ask around and try to find a certified professional that several people recommend. Assuming you have a family, you will be trying to optimize mortgage payments, tax deductions, life insurance, savings, investment returns and other factors specific to your situation. The folks that are trained to do this can be a big help and make a significant difference over time.
David Cary
7 years ago
Just to repeat what some have said - tax law changes the dynamic significantly. Interest rates are no longer super low. Historically low - sure. But history does not predict future. The aging population and anti-immigrant policies may slow growth significantly which will put downward pressure on interest rates long term. But who knows?

Probably best to hedge your bets. You need a loan. The options are not 75% LTV and 20% LTV, they are everywhere in between. I would consider a 50% option without knowing anything else about you.

Your current income matters as well as your state tax structure. The mortgage deduction got quietly removed for a large proportion (majority?) of homeowners. The primary users of the deduction now are high income folks, or high state tax folks, or anyone with large other deductions.
worthy
7 years ago
last modified: 7 years ago
As mentioned above, lender policies on financing construction of a new home are different than for financing a new or resale home purchase.

For instance, I have a pre-approval for purchasing an existing home or one to be completed by a builder. But the same lender will not advance me one cent for buying a lot and then building on it myself, even though I was a licensed builder for many years.