Buying A House: Should I Borrow More Money Than I Need Since Rates Are Low?

My wife and I are currently on the verge of coming to an agreement on a house purchase and we’re excited and terrified at the same time. In just a few short months, we’ll be running an online store, maintaining a small business blog, and taking care of a second child as well. Besides the need for an extra bedroom for our new little one and a nice backyard to play in, our business has required the use of more and more room as we continue to expand. In a nutshell, we are in desperate need of some extra space and this house fits the bill.

mortgage

Photo by Rev Dan Catt

The problem for me when it comes to home buying though is that I hate carrying a large mortgage. I was always brought up to pay my debts in their entirety and to not have any financial obligations hanging over my head. For example, I always pay my credit cards on time. I rarely if ever borrow money from friends. Hell, I won’t even borrow money to buy a car unless the finance rate is at or below the interest rate I can get at a bank.

All of these ideals are further reinforced by all of the frugality and personal finance blogs that I read on a regular basis. But principles aside, it looks like I’m going to have to bite the bullet with the house since I simply don’t have enough money to buy a home entirely in cash.

Our Situation

Speaking of cash, my wife and I are in fairly good shape. Because of our frugal ways and our online business, we have managed to save at least what I consider to be a decent amount of cash. And having this nest egg of money has allowed us to sleep very soundly at night. If I were to ever lose my job, we could survive pretty much indefinitely on our online business income at our current burn rate. If I were to lose my job and our business went under, we could still survive for a decent amount of time as well off of our savings.

But when you factor in the cost of the new house into the equation, our financial situation definitely worsens. That’s not to say that we are going beyond our comfort zone with this new house, but the size of the down payment will put a huge dent into our nest egg and introduce a fairly hefty mortgage payment as well.

The Question

If everything continues to go smoothly with both my job and our business, we can easily afford this house. If I lose my job for an extended period, our business can still pick up the slack for a very long period of time. But if I were to lose my job and our business went under, we might be in a bit of a bind. We could still survive for a reasonable amount of time but it would definitely be stressful.

By the way if you haven’t noticed, I’m more concerned about losing my day job rather than our business going under. That’s not to say that I’m insecure about my job, but I’m not 100% in control over my day job like I am with our online business. The likelihood of our online business suddenly making zero revenue is pretty close to nil. If anything bad were to happen to the business, it would happen gradually over time and we would be able to see it coming and adjust accordingly. With my job however, the executives and the board of directors might suddenly decide that the project I’m working on is no longer worthwhile and lay me off at a moments notice. This is a very important distinction and one of the main reasons having our own business is more stable than my day job.

In any case, I’m left with a very difficult decision. Do I borrow more money and maintain a larger nest egg or do I borrow less and have a much smaller monthly mortgage payment?

The Case For Borrowing More

We are currently in a unique situation living in this depressed economy. Interest rates for mortgage loans are at rock bottom. And while it’s still a bit difficult to get approved for a loan, once you do it’s a major bargain to borrow money right now. In fact the interest rates are so low that it is highly unlikely that rates will be this low again for a very long time. In addition at the rate the US government is printing money, it seems that higher inflation is inevitable making it extremely favorable to take out a larger loan.

The other thought I had in regards to taking out a larger loan and putting less money down is that my salary and our online business earnings will continue to rise to offset the increased mortgage payment. Borrowing more money also means having more cash readily available in case of disaster or more realistically in case we need to make any additional modifications on the house.

The Case For Borrowing Less

Borrowing less money is more inline with the principles that I was brought up with. By having a more manageable mortgage, either the business or my day job alone would suffice to cover all of our costs at our current burn rate. We would have to live frugally but I would have peace of mind that we could continue to pay the mortgage even in pretty bad times. The only problem is that our nest egg would be depleted leaving us with less money in case of emergencies.

Clearly there is a fine line here where we need to find a happy medium. Given the following hypothetical scenarios, which would you choose?

  • Take out a larger mortgage while maintaining a large enough nest egg for a years worth of burn rate in case something bad happens.
  • Take out a smaller mortgage with a significantly smaller nest egg but with a mortgage payment that is easily manageable by either the day job or business alone
  • Take out the largest mortgage possible to offset future inflationary pressure

I’m eager to hear your thoughts.

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22 thoughts on “Buying A House: Should I Borrow More Money Than I Need Since Rates Are Low?”

  1. A good analysis, and one which all home purchasers should go through. I’ve done it both ways, and at the respective times in my life, both were the right decision and I had no regrets. Sorry I can’t weigh in with any additional help.

    1. @Mary Jo
      Thanks for the encouragement. It’s a large amount of money that I’m about to part with so it’s good comfort knowing that things will work out one way or another.

  2. Hey Steve,

    If you are getting the same house regardless of how much you borrow, then I’m voting to borrow LESS. Here’s why:

    1) Borrowing cost – It’s not free money. Rates are low but it’s still more than the bank interests that your emergency funds will be getting.
    2) Emergency fund – I can see the concern of not having enough emergency funds for a while but that’s a temporary situation, because you will be able to build it back up to a sufficient level in no time with your day job + online businesses. Also, you already mentioned that you can get by with just the online business income so your risk of not having an emergency fund for a few months is extremely low.
    3) Access to funds – Once you borrow more, it’s very easy to live a higher lifestyle and use more money.
    4) Need for cash – if you really need money once you get a house and lose income, you can still get a HELOC or take out a business loan. People are complaining about not being able to get a home loan now because they are under water. If you are getting a house with a substantial down payment, that’s hardly the case.
    5) Cash Flow – The fear of losing income is largely due to cash flow. No one is ever afraid when they make more than they spend. If you take out your mortgage, sure, you will have more money in the bank but your expenses each month also goes up, which hardly helps your mental outlook.

    Of course, if borrowing more means a bigger house or you have an immediate need for the funds by borrowing more, then it’s an entirely different discussion :)

    Congrats on ALMOST buying a house!

    1. @David
      Yes, we are getting the same house regardless of how much we borrow and we are planning on putting down over 40% on the house to get the lowest rate possible. The question is whether to put even more down. What’s funny about this is that my friends are all over the map. The general thought is that if we have significant inflation in the next 5 years that it’s better to have the money on hand. I agree with your point #2 and #4. It’s just that 4 big expenses are happening simultaneously, the house purchase, a minivan(more on this later), a second child, and preschool for my daughter. Thanks for your input!

  3. Wow. This is a hard one, Steve! The last option sounds pretty good, but I’m not sure.

    My grandma always said “don’t count your chickens before the eggs hatch” and that has turned out to be sound advice, I’ve found.

    Sorry I’m not more help!

    1. @Michele
      Thanks Michele. Your comments are always appreciated.

  4. Hey Steve,

    This is a no brainer for me. Stick with your principles and “Take out a smaller mortgage with a significantly smaller nest egg but with a mortgage payment that is easily manageable by either the day job or business alone.”

    Wisdom dictates that it is never a good decision to presume upon the future. Two years ago my wife and I were in a similar situation and took out more mortgage that we should have. Hindsight shows me that getting a much smaller mortgage would have been a far better decision, especially in these uncertain economic times. And our house costs us only 21% of our NET income. Food for thought.

    I wish you and your wife all wisdom in this very important decision you have to make. :-)

    Cheers!

    1. @Matt
      Interesting. If your house only costs 21% of your net income, how would getting a much smaller mortgage impact your life today? Since the percentage is not a huge percentage of your earnings, why do you regret getting the larger loan? Thanks for all of the kind wishes. Right now the house is ours to lose and I have a few weeks to decide on the loan amount.

  5. I know borrowing more sounds like a good idea, but it’s actually not good for your finances long term. I’d vote for borrowing less.

    If you borrow money for your nest egg, you actually have a smaller nest egg than if you didn’t. If you borrow 10,000 and pay 500 in interest (over the course of the loan), you have to pay back 10,500.

    Without the borrowed money you might have a 2,000 nest egg, and with it you have 12,000. But 10500 has to be paid back, so you actually have a 1,500 nest egg. Less money.

    It’s hard to show math in a comment, but do you see how you’ll be worse off in the long term? It’s only the illusion of money.

    Your best bet is to borrow as low as possible, live beneath your means and build up that nest egg with your personal savings.

    1. @Christine
      I see what you are trying to illustrate. But if you change the scenario up a bit. Let’s say in the next year interest rates rise like it did in the 80′s. The bank starts paying out high interest rates and you can actually make some money by keeping the borrowed money in CDs in addition to having a nest egg. The situation is unique right now in that rates are extremely low and can only get higher. There will be inflation, it’s just a question of how much.

  6. We actually just closed on a house last Friday and faced a similar problem. We actually chose to go with a slightly larger mortgage in order to keep a larger just-in case fund.

    In our case, the decision came down to the house itself. We got an absolute deal on the house, partially because the furnace is older than I am. Sooner or later, it’s going to go and I’d much rather have the money on hand to fix it — sure, we’re paying more interest to the bank, but if the alternative is putting a new furnace on a credit card, I’d much rather pay the much lower rate on the mortgage. That said, I know we would have gone with a smaller mortgage if we bought a newer house.

    We are making up for that larger mortgage by making additional payments: in the long run, the interest we’re paying is worth the piece of mind I have about buying a new furnace. It’s not always a matter of money — feeling comfortable with your financial situation is an important benefit.

    1. @Thursday Bram
      Congrats on your house! Our house is a bit on the older side as well but we should find out if there will be any major expenses this thursday when the inspections take place. If anything has to be fixed immediately, that will greatly influence the loan amount I take out. The thing I don’t like about borrowing more but paying down the mortgage faster is that the monthly payment remains the same. In theory it has the same effect of increasing your principal but psychologically it doesn’t feel that way.

  7. It comes down to what you and your wife are comfortable with. Set a budget for the house purchase and don’t exceed that price or negotiaite the price of the home down. In your market, you should be able to get a great deal. This is not the last house you will purchase in your lifetime so buy in a good location for a good price and years from now, you will be bale to move up to that dream home. Good luck!!

    1. @Gail
      Very sound advice. I’d like to think that we’ll be in this house for quite a while but you are right, we probably won’t be here forever. I’m going to go check out your real estate blog now!

  8. My vote depends on what you do with the extra money. If you are going to throw it in the market or stuff it in a savings account then why borrow more? It’s not going to help you. If you are serious about leveraging that asset then I think you should borrow as much as you can. How else can you get tax-favorable access to that sum of money? If you needed to access it later then you’d have to ask permission. It’s your money take it. Remember the return on equity is zero. It’s the house that appreciates, hopefully!

  9. Steve, have you saved up in cash 30% of the value of the house? If so, that’s the first thing I do as part of our 30/30/3 rule. The other two is spending no more than 30% of your monthly cash flow on the mortgage, and the house costing no more than 3X your annual income.

    That said, if you’ve got mad cash in the bank, put 0% down and take advantage of the cheap rates. It doesn’t matter if you have a $1mil mortgage and $1mil cash in the bank, so long as you know what you’re doing.

    Best

    FS

  10. We’re in the same situation right now with shopping around for a house. We decided for put down between 20-25% to reduce the mortgage, as long as we have 6 months worth of emergency fund (cost of expenses x 6) in savings left.

    We also lowered our budget by $50-100K, and are started to see a number of houses that we liked, in good shape and are much cheaper in price than the houses we started with our first budget. The goal here is so that one person’s income can cover the entire monthly house payments, to reduce pressure.

    Good luck!

  11. Buying a house and deciding how much to borrow is really a hard decision. You made a great job weighing of the pros and cons. It is tempting to borrow more now simple because rates are low but it can be risky. You could get a good return on your investments but you also risk getting in over your head.

  12. Sam Sam says:

    Hedge it.. go half way between borrowing too much and borrowing too little :)
    In the same situation and planning to do what I say. But looking at the future – I am tempted to borrow just a bit more… Inflation is coming

    Sam Sam

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