How much should I put down on my mortgage?

How much money to put down when you buy a house can be a little tricky.There are a lot of moving parts.

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First, and most simply, you canonly put down money you can access. If that is the barrier, then this gets verysimple: put down what you need to in order to get the loan.

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If you're more liquid, there arebenefits to putting extra money down at closing. First, there is the impliedreturn on investment (ROI). For example, if you get a mortgage approved at 6.5%(fixed), every dollar you put down is "earning" that interest rate,since you are avoiding paying 6.5% interest on that dollar. Given that most bankacounts pay roughly 0%, this 6.5% is not nothing. It's also safe and certain.As long as you stay in the home and can afford the payments, you will earn thatROI. The downside is that money paid to the bank is somewhat less liquid than,for example, money invested in the stock market. This means that if you needthe money, it's harder to get. You can do a refinance, or HELOC (homeequity line of credit), but these take significant time, often have feesassociated with them, and may have a floating interest rate.

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There are at least two otherfactors to consider: 1) the power of compound interest and 2) expected returnson other investments (and risk tolerance).

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First, putting extra money down nowis a big example of utilizing the power of compound interest. For example, ifyou put $10,000 extra down, you'll save $650 in interest in year one, but$8,771 in 10 years and $25,236 in 20 years (way more than 6.5% a year!).

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Next, if you believe the stockmarket (or other investments you have access to) won't beat 6.5% a year whileyou're in the house, then that 6.5% may be a great option. On the other hand,if you expect a decade of 10% returns in the stock market, you'll be leavinginvestment returns on the table by locking your money up in your home. However,you need to ask yourself whether you (and your bank account) have the stomachto deal with the roller coaster ride of the stock market. If not, maybe a sure6.5% is better.

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As with any big financial decision,you'll want to weigh these factors carefully.

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