Although many experts will say it's wise for
income earning folks to have a large mortgage because of the low rates and
tax deduction, it's not right for everyone. Here are some things to think
about:
Private
Mortgage Insurance (PMI). PMI is a monthly fee that
the borrower pays if the first trust loan exceeds 80 percent of the
purchase price. Since a lower down payment results in a statistically
higher risk to the lender, PMI insures a portion of the loan to reduce
the risk to the lender. Thanks to creative lenders, however, a borrower
can still put as little as no money down and avoid PMI by taking out
two loans. Ask your loan officer about loan packages with no PMI, sometimes
called "piggy-back" financing.
Monthly
payment "comfort level". This is a very
important issue. If you have good credit and income, most lenders will
qualify you for a larger loan amount than your would want. The first
thing you should do is assess your personal spending and saving habits
and try to come up with the maximum mortgage payment that would fit
into your budget.
Taxes. Understand
the benefits of mortgage interest and real estate tax deduction. Since
you will own the home, you will be able to deduct all the interest and
taxes you pay on the home. Consult a tax expert on these issues, but it's
important to get an idea of how much of a tax break you will receive if
you own the home. This will help you decide your mortgage amount.
Opportunity
costs. Analyze the "opportunity cost" of
a large down payment. In other words, if you put down 20 percent, or
$44,000, what are you giving up? Is the $44,000 earning a good rate
of return? Do you have to sell securities and pay capital gains taxes
to liquidate the money? Get an idea of how much it will cost you to
put down $44,000.
Other
debts. Take into consideration other debt you may
have. For example, if you are carrying substantial credit card debt,
it would probably be better to pay the cards off instead of putting
down a large down payment.
Hopefully this is a start in the
right direction when determining how what mortgage balance you should carry.
