The Numbers vs Emotion argument…
Meet Marcus and Kelly – they are a young couple, selling their home and buying a new one. Being that it’s a seller’s market, Marcus and Kelly will do very well and walk with $100,000 from their sale.
So, what do they do with the money? Do they put some, half or all of the funds down on the new home purchase? We are going to break down what the best decision is, by the numbers, for the purchase of their $250,000 “forever home”.
| Option A (20% down) |
Option B (ALL Funds) |
|
|---|---|---|
| RATE | 4% | 4% |
| LOAN AMOUNT | $200,000 | $200,000 |
| DOWN PAYMENT | $50,000 | $100,000 |
| PAYMENT | $954.17 | $716.12 |
| INVESTABLE FUNDS | $50,000 | $0 |
| MONTHLY INVESTABLE | $0 | $237 |
Marcus and Kelly have come down to option A, putting 20% down, having a $200,000 loan amount and investing the remaining $50,000. Or option B, putting the full$100,000 down, having a $150,000 loan amount and investing the difference in payment, which is $237/month.
Future Value Analysis – @ 8% Return
| Option A | Option A | Option B | Difference |
|---|---|---|---|
| YEAR 10 | $85,542 (less additional $237/mo) | $43,358 | $39,184 |
| YEAR 15 | $122,686 (less additional $237/mo) | $82,011 | $40,675 |
| YEAR 30 | $461,466 (less additional $237/mo) | $353,215 | $108,251 |
To properly analyze, Marcus and Kelly are assuming an 8% return on their funds. Option A returns are adjusted for the higher mortgage payment and option B assumes that the difference in mortgage payments is invested each month.
By using the same assets, with proper investment advice, option A winds up giving Marcus and Kelly an additional $39,000 by year 10, and $100,000 over 30 years, just by properly applying the concept of time value of money.
So to conclude, provided the difference in payment won’t keep you up at night and you have time for your investments to grow, then only put 20% down and invest the rest with a knowledgeable investment advisor.