I was in the military and my wife and I are now looking into buying a home now that I'm out. We were thinking about getting a VA loan. We have money set aside that we could use as a down payment, but would it be better to put that money down initially or keep it as an emergency fund?
Dwight, This is a good question, and all good questions have the same answer; "It Depends" There are a few factors we want to take a look at; first, having an emergency savings is a crucial part of financial planning, especially in our current economy. My first questions would be "does this money you are considering using as a down payment constitute all of your emergency savings?" My suggestion to my clients is that they have a minimum of 6 months of their lifestyle needs, but I like to see 12 months. If you have more than 12 months, you may consider placing additional funds on your loan Next, having a large down payment can help you financially over a long period of time, when signing a mortgage, it always astounds me at how much you will actually pay for your home, after interest is applied. For instance, let's say that you purchased a home and mortgaged $150,000, in a fixed rate of 5%, over a 30 year term...your total payments of $805.23 over 30 years would be $289,882.80, nearly double the original mortgaged amount. Now let's say that you had $25,000 you could put down, so now you are mortgaging $125,000, and because of the 0.5% reduction for a shorter term and the down payment you can now afford a 20 year term at 4.5%...see how a down payment can help...now you are paying a payment of $790.81 for 20 years a total of $189,794.40. So here you put in $25,000 put saved $14.42 per payment...negligible but this isn't...a savings of $100,088.40 over life of your mortgage. Again, I know saving over 100K sounds good, but don't sacrifice your emergency account over it. If you lose your job and have a difficult time finding work, or you run into long term health problems or any other host of problems that create havoc on our lives, you may end up sacrificing your home, and in the end, it simply isn't worth the risk.