A Downpayment On A Home Is Not A Cushion

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Once more, the major media outlets miss the bigger picture.  This time, the story comes from the Chicago Tribune via Money Magazine.

The offending quote:

[New York City financial planner James] Kibler says he likes to see buyers put down at least 10 percent, because they will have a cushion should home prices dip. If you pay $300,000, for example, and need to move after a year, you'll only have to pay off a $270,000 mortgage balance. That gives you the freedom to sell for slightly under what you paid for the house and pay a real estate commission.

I am not trying to pick a fight with a well-known planner, but this is one of the least-informed statements I have read in a long, long time.  Here's the problem with Kibler's statement -- it's right out of Homebuyer Psychology 101.

To categorize a downpayment as "a cushion" against falling real estate prices is a farce.  The $30,000 is not a cushion -- it's a potential loss. 

Here's why.

If you sell your home for less than you paid for it, then you've lost money on your real estate investment.  This happens irrespective of your initial downpayment.  Making a downpayment to protect yourself against market losses is a broken concept.  This is a simple game of Pay Now, or Pay Later.

There is no real protection from falling real estate prices other than to limit your investment in it.  That means putting no more principal in your home that you absolutely have to because if you sell your home for a loss in a year, there are two scenarios:

1. You liquidated savings accounts last year to make an initial downpayment and that downpayment is used to cover your loss
2. You didn't make a downpayment at all, and you liquidate your savings today to cover your loss

Considering that your savings earn interest in a bank account and your equity earns nothing, Outcome #2 is a better result because Pay Later earns more interest than Pay Now.

The concept of a "cushion" is a pure psychological play, and Kibler should know better.  To that end, so should Money Magazine and the Tribune.