How Much Down How Much Borrowed

n deciding how much cash to put down, remember that getting settled in a new home always ends up costing more than you anticipate. Hold back some cash for furnishing and unexpected outlays. Add an extra cushion of cash if you're buying an older home that could surprise you with a plumbing or roofing expenses.

Should you borrow as much as you can? Small down payments and big mortgages give you the power of leverage (see Chapter 1) as well as available cash for other investments. And when inflation runs as high as or higher than mortgage interest rates, and you are paying back what you borrowed with dollars that are steadily losing their purchasing power, the answer is easy: The bigger the mortgage, the better.

Current tax law still stacks the deck in favor of the largest possible mortgage. Your original mortgage sets the cap for debt on which interest is deductible. (One exception lets you increase this cap by amounts you borrow—via refinancing or a second mortgage—for major home improvements. For details, see Chapter 3.) If you make a large down payment but later need the cash, you can tap the money with a home-equity loan or refinance the house. But interest on home-equity loans over $100,000 isn't deductible.

For most first-time buyers, there's no point in weighing the trade-offs. Most will have to borrow to the hilt and scrape hard to come up with the minimum down payment. However, many so-called move-up buyers will come into a substantial sum of money when they sell their old home. Their decision will be tougher: whether to invest the cash in the new home and take out a small mortgage or invest the money elsewhere and borrow a large amount.

SHOP ONLINE FOR A MORTGAGE

Mortgage lending is a national business these days, so you can conduct a national search for the best rate. The fastest way to do it is online. (If you don't have access to the Internet, ask your broker to help or make a trip to a computer-equipped friend's house or a large public library.) The following sites can be especially helpful. Each carries up-to-date listings of lenders and rates, as well as general mortgage information, calculators and other helpful tools for mortgage shoppers.

HSH Associates (www.hsh.com). Provides mortgage rates, averages by city and state, calculators and links to lenders.

HomePath (www.homepath.com). Sponsored by Fannie Mae, offers general information on home and mortgage shopping.

iOwn® (www.iown.com). Lists rates from the nation's largest mortgage lenders and brokers, allows online mortgage application.

Kiplinger.com (www.kiplinger.com). Click on "Tools," then "Find a Mortgage" for help in comparing mortgages.

BankRate Monitor (www.bankrate.com). Follows competitive rates in all 50 states and Washington, D.C., provides credit news and helpful calculators.

RateNet (www.rate.net). The largest, most comprehensive interest-rate database in the industry and on the Internet; keeps tabs on 9,000 lenders in 175 markets and finds the ten best rates in your area.

Nationally, investment returns on single-family homes over time have been modest compared with returns on such financial investments as stocks and bonds. Home values in some areas will keep pace with inflation and in some areas may do significantly better. Before you buy, try to assess the future of the economy in your home area and the demand for homes of the type, location and price range of the one you want to own. For example, within a given metropolitan area, some neighborhoods may appreciate very well, while others stagnate. In some areas, luxury-priced houses will go up relatively more in value than starter houses; in others, just the opposite will occur.

If you have unusually good job security, you may want to gamble on a bigger mortgage than someone whose employment is precarious. Job security will affect the kind of mortgage you choose, too. If your job is safe in high-inflation or recessionary times and your earnings will likely keep pace with the cost of living, you'll be more comfortable with an adjustable mortgage than someone who lost ground in the last period of high inflation and high interest rates.

Remember that home equity—unlike financial assets such as bonds, CDs and dividend-paying stocks— pays no current income, so be cautious about pouring all you have into a new home. For example, if the stock market is moving up, your cash will be tied up in a home that is not paying you any income and that may be appreciating less rapidly than good-quality stocks. If you put all your cash into your home and then need some money later, you can borrow it, but you'll be paying at or above the prime lending rate for a home-equity loan, and usually more for a fixed-rate second mortgage.

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