Smaller down payment may make better sense


January 15, 1995|By Michael Gisriel

Q: Should I make a larger or smaller down payment on my new home purchase? If possible, I don't want to make mortgage payments for 30 years. What do you advise?

Dolores McGallen, Annapolis

A: Generally speaking, large down payments on homes are not the most productive use of investment dollars. Instead, why not make a smaller down payment, and take out a shorter term mortgage such as a 15-year fixed loan.

Here's a quicker example:

If you buy a $100,000 home, put down $20,000, then sell it for $120,000 a few years later, your investment of $20,000 would have produced a $40,000 return -- before expenses and taxes.

But if you put down only $5,000 and you eventually sell for $120,000, you would have turned $5,000 into $25,000 -- a much better return.

In the second example, you can take the $15,000 you did not put into the house and invest it. If this investment makes more than the cost of borrowing the money -- including perhaps paying for mortgage insurance for having a down payment of less than 20 percent -- then this option may be best.

Q: I'm looking at buying a house that needs some improvement or remodeling. Do you recommend that I offer a purchase contract contingent on the seller fixing the house or should I just offer less money to purchase the house and have the home improvements done myself?

Pat Yetsky, Owings Mills

A: According to real estate professionals, the best home improvement buys are usually obtained on houses where the owners remodeled for themselves to live in and use in contrast to renovations already completed by a speculator, developer or seller looking for a quick turnaround sale.

The occupying homebuyer usually uses better quality materials and is not looking for a profit margin or markup on the renovations or repairs.

I recommend that you offer less money to purchase the house "as is" and then have the home improvements done after your closing. That way, you'll get the improvements you really want and save money.

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