One of the families I work with decided to upgrade homes this year in order to have more space for their growing family. The big conundrum was whether to get the physician loan (with 0% down) or use the cash they had saved up over the last few years to put 20% down and lower their monthly mortgage payment.
We compared the 2 options in order to decide what makes the most sense for them based on their cash flow and their desire to have Nancy, the wife, be able to work less once the baby comes.
The house costs $810,000
Option 1 is taking out a regular jumbo loan with 20% down at 4.999%: Total Principal Paid $648,000 Total Interest Paid$ 604,297.48 Monthly Payment$ 3,478.60
Option 2 is taking out a Physician Loan which comes at a higher interest rate of 5.375% Total Principal Paid $810,000 Total Interest Paid $822,876.13 Monthly Payment $ 4,535.77
As you can see, the monthly payment differs by about $1000 a month so putting 20% down lowers your monthly cash flow spending on a house. This gives you more financial flexibility, so if you need to cut back on work hours or you experience a drop in income for some other reason having a lower mortgage payment helps lessen the impact.
However, if you don’t put the down payment you have the cash to invest/remodel or use for some other need. Keeping excess cash in the bank isn’t recommended especially now that inflation is above 8%, you are losing money on savings at the bank.
If you were to invest it, you could theoretically come out ahead when compared to the interest expense on your mortgage. It is a personal decision as much as it is a financial decision, assuming you can afford to pay either monthly mortgage payment without concern. Below is an illustration of taking the 162K that would make up the 20% down payment and investing it in the market at an assumed 7% rate of return.
The future value calculator can be used to calculate the future value (FV) of an investment with given inputs of compounding periods (N), interest/yield rate (I/Y), starting amount, and periodic deposit/annuity payment per period (PMT).
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment, tax, or legal advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.