Copyright © Chantal McBride
http://www.WebTD.com
Today I am going to discuss how to figure out what type of down payment one should make when purchasing a new property. With most lenders you will get access to the best rates on mortgage loans by making a larger down payment. Your options and goals are factors to consider when figuring out whether a larger down payment makes sense for you.
For financial reasons, it is important to consider the interest rate you are paying on your mortgage versus the rate of return your investments are generating. For example, let’s say you get a fixed rate mortgage at 6 percent. In order for you to come out financially ahead, your investments need to produce an average annual rate of return, before taxes, of about 6 percent.
It is also important to consider the tax impact. It is true that mortgage interest is usually tax deductible, but don’t assume that those deductions are that great. Many people don’t realize that they have lost their ability to fully deduct their mortgage interest on their tax returns. It is possible to lose up to 80 percent of your mortgage interest deductions by exceeding the set bracket on your adjusted gross income (taxable income from all sources before subtracting itemized deductions and personal exemptions.)
In order for you to have a reasonable chance of earning more on your investments than it’s costing you to borrow on your mortgage, you must be investing in more growth oriented investments such as stocks and investment real estate endeavors. In general, stocks and real estate investments produce annual average rates of about 10 percent, but there is no guarantee that you will actually earn these returns. Growth type investments can easily drop 20 percent or more over a short period of time.
It is not wise to make a larger down payment if you are not taking advantage of contributing to tax deductible retirement accounts such as 401(k) s and 403(b) plans. Doing so will give you no tax benefits and will make it difficult for you to take advantage of the tax reduction accounts.
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