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Portfolios Pit Down Payments Against Stock Market

by Broderick Perkins

The bullish stock market is leading some home buyers into uncharted waters -- reducing down payments to invest money in the stock market.

It's an investment option that can help diversify your portfolio but, like most options, it isn't bullet proof. Do all the math before you take the plunge.

"If your point of reference is the last couple of years of investments in stocks, you are too young to remember that markets don't always go up," says Jack Guttentag, professor emeritus at the University of Pennsylvania's Wharton School in Philadelphia.

Just as securities-backed mortgages is an option of the times, the down payment-vs.-stock investment buzz isn't pie-in-the-sky speculation.

In January, the Federal Reserve Board's "Recent Changes in U.S. Family Finances: The 1998 Survey of Consumer Finances" said, while the median value of a family's stock holdings alone rose 62.3 percent from $15,400 in 1995 to $25,000 in 1998, the median value of homes rose a paltry 4.6 percent during the same period.

A home represents 27.9 percent of a family's total wealth, but returns from stocks, bonds, mutual funds and retirement accounts comprise nearly as much, 27.2 percent percent, according to the Fed's study, which stops at 1998 without considering the impact of last year's bullish stock market.

"I know of people who were in a position to pay cash, but they get adjustable rates instead and invest the spread," said Jim Paulson, a real estate agent with John L. Scott in Boise, Idaho.

"For example, instead of paying $200,000 cash, why not get an adjustable rate that will be low for the first few years and invest the $200,000 into tax free bonds (for the risk averse) or into mutual funds," Paulson said.

But that's a simplistic apples-and-oranges comparison that doesn't consider the down payment as a multi-pronged investment tool, say Guttentag, who also operates The Mortgage Professor Web site.

The down payment investment includes:

A smaller loan. A larger down payment reduces loan costs and the amount against which interest is applied.

"If you borrow $10,000 less, you save not only the interest, but the upfront fees on the $10,000," said Guttentag.

No PMI. Loans with 20 percent or greater down payments come without private mortgage insurance premiums -- effectively a no-risk portion of the investment.

Less interest. If the larger down payment reduces the loan to the conforming loan level of $252,700, your interest rate will be 0.25 percent to 0.375 percent cheaper.

Equity. If you begin home ownership with 20 percent down, elementary arithmetic reveals much greater equity than with a zero-down loan.

Guttentag says when you consider the down payment as an investment the rate of "return" can be as high as 14 percent, when you factor in the loan term, how long you hold onto your home and other factors.

"If you want to make rate-of-return comparisons with other assets, you must remember to convert the returns on the other assets to an after-tax return as well," he said.

Generally, poor judgment relies only upon recent stock market returns to make long-term investment decisions, which likewise should consider long-term factors. However, with hard numbers to calculate, figuring your "return" on a home investment is much easier then predicting stock market ups and downs.

"If you are confident you will continue to earn 20 percent or more in the stock market, go ahead and do it, but if the market takes a nose dive, your security goes in the tank and you are not going to have any equity in your home," Guttentag warns.

Paulson concedes the risk of trading your down payment for securities isn't for everyone.

"I wouldn't do that if it was my only resource. It's hard enough for people buying their first home just to scrape together the down payment and it's a challenge to get the closing costs," Paulson said.

"This is for someone who is solvent and prudent about handling investments. There is a lot of potential. Instead of putting 20 percent down, just make 5 percent and make out a hell of a lot better," he added.

Also See:

Owners Trade In Stock Earnings For Remodeling Equity

Financial Assets Muscle In On The American Dream

Are You Really Home Free With A Zero-Down Mortgage?

Published: February 10, 2000

Use of this article without permission is a violation of federal copyright laws.

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home.

The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services.

The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home.

Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News.

Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake.

He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications.

In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.

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