Big Home Down Payment an 'Iffy' Investment

QUESTION: I am buying a home worth $300,000. Due to a sale of a prior home, I have $200,000 to put down as a down payment. Is this advisable?

ANSWER: To most home buyers, a home is a shelter first and an investment second, and that's how it ought to be. There's no reason, though, you can't take an investor's perspective on your upcoming home purchase. That means asking yourself this: Where will that $200,000 burning a hole in my pocket give me the most mileage and flexibility? At present, it might not be the housing market. Not that a home isn't a good long-term investment. Homeownership, after all, creates the only significant nest egg many American homeowners will build in their lifetimes.

At this juncture, however, value appreciation is iffy in most markets, at least in the near term. Even if you plan to stay put awhile in your new home, you might opt to keep most of your money in a more liquid safe haven in case you need to access it fast for any number of emergencies that life can throw at you. Keeping cash at hand will give you breathing room not only for contingencies, but for home improvements, travel and any number of wants and needs.

In a nutshell, if the rate of return on your investment exceeds the mortgage rate you'll be paying, borrowing a larger amount actually puts you ahead of the game. Diversified stock investments, mutual funds or bonds can offer such reasonable returns, but they aren't nearly as safe as CDs, government bonds or those good old-fashioned FICA-insured, interest-bearing savings accounts.

There is another side benefit if you opt for a more conventional mortgage arrangement: the mortgage-interest tax deduction. However, as a seasoned homeowner, you already know it's not the dollar-for-dollar return that many people think it is. Those who fall into the middle salary range will likely get between 25 and 30 cents back on every dollar they've paid in interest -- not bad, but not a windfall.

If you still want to plunk down that wad of cash, you will probably have little problem getting a chunk of it back out by borrowing against the place. Paying that much in cash also means you'll have to jump through fewer hoops to meet loan-eligibility requirements. But -- and this is a big "but" -- if you're retired or unemployed it might be difficult getting a home equity loan or second mortgage without a steady income.

This kind of decision is not one to be taken lightly. Before you do anything, consult with a Certified Financial Planner, registered financial adviser or other qualified, licensed professional who can sketch out your options and the inherent risks and returns. Personally, I'd opt for a safer investment in this dicey part of the market cycle. But you may be one of those folks who simply feels more secure having no mortgage payments or low mortgage payments.

Good luck with your new home!

Bankrate.com is the Web's leading aggregator of information on financial products including mortgages, credit cards, new and used automobile loans, money market accounts, certificates of deposit, checking and ATM fees, home equity loans and online banking fees. Visit Bankrate.com to get the tools and information that can help you make the best financial decisions.

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