Determining How Much To Put Down

A: It's a question that comes down to a few factors most important of which is your comfort zone and opportunity cost. How much money do you need in liquid assets AFTER closing to be comfortable given your current financial situation and lifestyle. Only you know how much money is coming in and being spent. But one thing I can tell you is that putting more money down at closing, if possible, is a good thing if your money is in cash earning very low interest!

While there is nothing wrong with putting down the bare minimum of 10% for a condo and 20% or so for a co-op, many buyers come to me with their full financial picture asking how much money they should put down past the minimum requirements.

First off, you need to crunch your own financial numbers and ask yourself a few questions regarding the property you are thinking of purchasing. Start with these questions:

1. How Much Will This Property Cost Monthly - A must! Do you even know what the property you are considering buying is going to cost you per month before tax benefits? Call your mortgage lender and get a rate quote based on your credit score and other factors and then go visit bankrate.com's mortgage calculator and plug in the numbers! Then add in the monthly maintenance and real estate tax payments (only maint. for co-ops as your taxes are included in this payment) to get your TOTAL COST OF OWNERSHIP!

2. How Much Are You Bringing In - Your debt/income ratio is a number that many co-ops look into to make sure that your total costs of home ownership do not exceed a certain portion of your take home income. Generally, you want to keep your total costs of living under 30% of your take home monthly income.

For example, if you take home $6,000/Month and the property you want to buy will cost you $2,000/Month, than your debt to income ratio is 33% (2000/6000 = 0.333333). This means that 1/3 of your gross monthly income is being put towards your living costs. You will also need to add in your minimum debt payments to this calculation; especially if you have high credit card debt or student loans (which is good debt and not looked upon as negatively as credit card debt in the eyes of board members).

What you are taking home in salary on a monthly basis largely determines how much of your assets you could put into your home. If you are making 10x your total cost of living payments, than obviously you could put down a lot more money at closing towards equity in the property as you would require less security in liquid assets afterwards due to your higher salary!

3. How Much Liquid Assets Do You Have - The biggie! You don't want to stretch yourself too thin but this post is for those in the opposite position and with suitable assets. To buy a new home you will have to pay transaction fees in addition to your down payment; nothing comes for free! If you are buying a condo than your closing costs will be significantly higher than if you are buying a co-op; so you must plan accordingly ahead of time.

First, determine what the TOTAL amount of liquid assets you have. This includes all asset classes that are easily convertible to cash. For sake of this discussion, lets call your assets 'A'.

TOTAL LIQUID ASSETS = A

Quick Tip: 401K other pension accounts do not count unless you have full access to this money w/out penalty. Real estate equity is also considered illiquid until you cash out, however you can pull out equity via a HELOC to cash into your checking account for another property purchase. If you are doing this be sure to take care of it before you buy the new home and already deposited the monies into your liquid accounts.

Now that you know your total assets, you must determine how much the minimum down payment + closing costs will eat up at closing; you do this so you know what you have leftover and how much of that you should put towards equity. The best thing to do is to contact your real estate attorney for a breakdown of closing costs for your specific property in question. Lets call your total closing costs estimate 'X'.

DOWN PAYMENT + CLOSING COSTS = X

4. What's Left - Do some math! Take your total liquid assets and subtract the down payment and closing costs to see what is leftover!

A - X = ?

For Co-ops: You will need to show 1-2 years of liquid assets AFTER closing to the board for review and approval. This is generally a bare minimum. Some co-ops request higher amounts. You can find out exactly what you need to pass a board by asking the listing broker of the property; specifically you should ask..."how much salary and liquid assets after closing does this board look for in prospective buyers?"

For Condos: You will need to show a few months at least of total monthly payments in liquid assets after closing for the listing broker to pre-approve you. Yes, its a condo and there is a right of first refusal process, but that does not mean you can put all your liquid assets into the down payment + closing costs! You still need to show something afterwards, although not as much as a co-op would demand.

COMFORT LEVEL & ROI

Still reading? Good!

Now that you know how much money you will have leftover after closing there are two main items you need to look into. First is your comfort level. Based on what your take home pay is, your expected total cost of living & other debts, and closing costs how much money do you need in your accounts after all is set and done to feel safe?

If your salary is just making it to cover your living costs, I would certainly want to have at least 8-10 months of living costs in liquid assets. If you have more than that, I would strongly consider putting more money down at closing so that your monthly living costs are lower, bringing your debt/income ratio down as well! This will make your daily life more comfortable knowing that your salary is more comfortably covering your living costs.

If your salary is easily covering your living costs and your debt/income ratio is below 30%, than you need to see how much your liquid assets is returning back to you via investments? If your money is in stocks or short term CD's, than you are probably used to a 5-8% return on your investment with stocks being the higher end. However, if your money is sitting in a checking account earning 1%, than you would be much better off putting MORE money down at closing and taking out a smaller loan!

The key here is understanding that you are paying interest on the loan amount you take out. So, if your investments are earning that interest or more for you, than it would be better to leave them as investments and utilize the tax benefits on the interest payments of the loan. However, if your money is earning little or no interest, than you would be better off putting more money into your down payment and taking out a smaller loan!

UrbanDigs Says:

PUTTING MORE MONEY DOWN WILL LOWER YOUR MONTHLY PAYMENTS AND AMOUNT OF TAX DEDUCTIBLE INTEREST YOU END UP PAYING. YOU CAN ALWAYS TAP INTO THIS ADDED EQUITY AT A LATER TIME BUT YOU MUST CONSIDER THE OPPORTUNITY COST OF PUTTING MORE MONEY INTO REAL ESTATE EQUITY AS OPPOSED TO WHAT IT OTHERWISE WOULD BE DOING FOR YOUR PORTFOLIO

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