Today we are going to talk about the 20% down payment. During that research of buying a house, you’ll probably realize that there are a lot of different mortgages available in the market requiring you a different type of down payment.
You have loans that will require you to put down a 5%. Some of them are 10% and some of them are 20%. Some people say that the 20% down is actually a better deal. One, because you get more equity into the property. Two, because you get to eliminate the need for a PMI. PMI basically stands for private mortgage insurance and it’s required for all mortgages where the buyer is actually putting less than 20% down for the down payment.
People who are actually paying 20% down for the down payment of the house, they’re in fact paying a lot more than that. They’re not paying just the 20%.
On the earning statement you will see:
- The company address
- Your employee ID
- Your name
- Your social security, and then when through one are you getting paid, and when is your check being issued. You will have the number of hours that you work and then how much you actually earned.
That’s what you’re getting paid for these number of hours that you’re actually working. When you look at the withholding or the deductions column, then you will see all kinds of taxes coming out of your paycheck.
Down payment for a property: Depends on your Tax Bracket
Depending on your tax bracket whether you’re filing as a single, married filing jointly, or filing separately, or whether you are a head of household, these are the different tax brackets that you will fall into depending on how much you’re actually making a year. Let’s say for illustrational purposes, we are going to assume that you make $50,000 in a year. When you’re making $50,000 filing as someone who is single, your tax bracket is 22%. Let’s remember this number.
We have a 22% tax bracket and we have a salary of $50,000 annually. Let’s say for example, that this is what you’re making and that 22% is actually taken out of your salary. That number is actually equal to $11,000. For example, you saw a house, a beautiful house that you wanted to buy. The price that you’re willing to pay for the house is $100,000, which means that 20% of it is equal to $20,000.
You think you’re paying $20,000. But in reality, you’re paying $31,000. Why? Because this amount was already taken away from you before you even got paid. Now you’re probably thinking, “Well, so what other choices do I have?” You can’t just invest with pre-tax money. “Does that mean that a house is a bad investment and I’m doing something wrong here?” Not entirely. Some researchers and authors have shared their point of view as to why this down payment, it’s a lot more than what you think you’re paying.
Down Payment for a Property: What is OPM?
That’s when the concept of OPM always comes in. It means Other People’s Money. What is other people’s money? Other people’s money is basically money from your credit cards. It could be money from a cash-out refi or from a HELOC. Why is it that a credit card is considered other people’s money?
Well, you’re using the bank’s money. You’re using the bank’s money to invest for that down payment and your property. A cash-out refi, even though you’re using the equity of some of your properties, it is still cash that is coming from the bank. Same thing with a HELOC, you’re using the equity of your home, but at the same time, it is money that is given to you from the bank. Where do you think that bank is getting that money from? It’s getting that money from people who like to save, who like to open bank accounts and want to hoard their money in there.
What the bank does is that they’re taking that money out of those accounts and they are investing it with you. They’re giving you the opportunity to take $20,000 out or $80,000 depending on how you want to look at it, whether you want to get the mortgage with a bank, or whether you want to use a HELOC or a cash-out refi for that $20,000. The bank is giving you that money, of course, at a rate, where you have to pay a mortgage rate, a mortgage interest rate. Then based on that rate, they’re making their money back. As you’re repaying that loan, they’re taking that money and putting them back into the bank account and so on, and the whole cycle repeats.
You need a Mortgage
Credit card, cash-out refi, HELOC, that entirely the concept of other people’s money. You’re using this amount for the down payment. At the same time, the remaining $80,000 that you need, you are mortgaging that amount. You’re going to the bank and say, “Hey, I need a mortgage for the remaining amount. I have $20,000 to pay down.” Where do you think the bank is going to get that remaining $80,000 strong. They’re going to get it exactly from the bank, from other people’s money. It’s a way to shift your thinking. It’s a way to shift that mentality.
If you’re probably thinking “Well, now I have two loans or two mortgages to worry about”, that’s why you need to learn a little bit more about the different concepts of good debt versus bad debt and how to use it to our advantage.
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