Q: I have a home-buying question. Rates on savings accounts and money market accounts are below 1 percent. CD rates aren't much better. At the same time, mortgage rates are still well above 4 percent. I'm about to buy a $200,000 house, and I have more than half that much in my savings account. Why wouldn't I be better off putting everything in my savings account towards the home purchase, rather than borrowing that amount and paying more in interest than I'd be earning if I kept the money in savings?
A: If you have more than enough savings to cover a down payment, it is certainly worth considering putting a significant chunk of those savings towards the home purchase, rather than having to take out a bigger mortgage. After all, even allowing for the tax deductibility of mortgage interest, you will be paying more interest on the loan than you could earn in savings or money market accounts at the moment.
Still, before you dig deeply into those savings, you need to ask yourself two questions:
- How much might you need for emergency liquidity needs? It's always good to have a cash cushion, so you don't have to dip into longer-term investments should an unexpected expense arise.
- Will you be disciplined about rebuilding those savings? If you dip into savings to reduce the size of a mortgage, you should make yourself a schedule for rebuilding those savings out of the lower mortgage payments that result.
Remember, this isn't all-or-nothing. You can put more than a standard down payment into a home, while stopping short of draining your savings down to critical levels. Another alternative is to consider a shorter mortgage. You can use your liquidity to help make the higher monthly payments that would result, and in the long run you'd save because shorter mortgages have lower interest rates and are paid down more quickly.
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