When you purchase a home, particularly in what may be the biggest financial transaction of your life, there are many ways to cost or save you money. Make your financial decisions carefully. Consider the following:

How much down payment?
If you can, make a 20% down payment. At that point, the mortgage insurance premium (usually about 0.5% of your payment) is not charged. That also is the point where you can hold your own escrow (savings for insurance and taxes), but see later for pros and cons.

Should you pay cash?
Probably not, for a couple of reasons.
1) If you pay cash, you will be unable to access your money in case of medical problems, tuition, etc.,
2) You can make more money by investing in a good mutual fund than you save on your interest (see below), and
3) You can double your principal payments anyway and still save the interest while ensuring access to the funds if you need them. Your money will be under your control, not the mortgage company.

What type of loan?
* Most people move in 5-7 years. If you are one of these, consider an ARM (adjustable rate). The lower initial interest rate will likely save you thousands of dollars over a 15 or 30 year fixed rate. But get a stable base on which the rate is calculated. Check the alternatives with different mortgage companies and compare. Have them show you at least a 5 year history.
* A fixed rate is recommended for those who plan to be in the home for an indeterminate period, and those who don't like the uncertainty of an ARM.
* Use an FHA loan at 3% down if you can't make the down payment requirements of a 5% down conventional. Be advised though, that you will likely be paying more due to higher upfront mortgage insurance premium and sometimes higher rates.
* If you are eligible for a VA loan, you don't need any money for a down payment; you can even finance closing costs. Interest rates could be higher than conventional, but check on this. Be sure to apply for your Certificate of Eligibility before looking for a home. It takes a while to get this.

How much can I borrow?
Monthly Payment
* For a convertional loan, your monthly payment of principal, interest, taxes, and insurance (called PITI) usually cannot exceed 28% of your income. Another consideration is your debts. Adding them to your PITI shouldn't exceed 36% of your income. There are exceptions, so check with your REALTOR® or loan officer.
* For a government loan (FHA or VA), the PITI usually can't exceed 32% of your income and the debt ratio isn't supposed to exceed 42%.
Maximum Dollars
* The maximum dollar amount for a government loan on a single family home is set by the agency. VA is approximately $203,000 and FHA is determined by the metropolitan area (in St. Louis County $142,050; St Charles County $105,700). This is changed periodically, so check.
* There is no maximum amount for a conventional loan but there is something called a Jumbo loan that has a higher (~1/4%) interest rate. Currently a Jumbo is above $214,599.

When should you hold your own escrow?
* If you have the discipline to put the amount of your taxes and insurance in an account each month.
* If your escrow account is separate from your savings or checking.
* If your account pays at least 5% interest and it's no risk.
* If the risk is worth the $6-7 a month you will be saving, considering taxes and fees. (based on a $130,000 home)

Remember, the tax man has the ultimate control and the mortgage company is not far behind. They can get nasty.

Let's compare Cash vs Borrowing.
Assume $100,000 home, cash versus 20% down; 10 year period; 8% loan at 30 yrs; 8% investment return; 28% tax rate.

Pay Cash: $100,000 invested in home. No interest paid. At the end of 10 years you still have $100,000 equity.

Pay 20%, Borrow 80% and Invest the $80,000:
* At the end of 10 years, you've paid approximately $60,600 interest on your loan. After tax deduction the interest is really $43,645. Additional equity in the home due to your payment is $9,820, for a total equity of $29,820 (original $20,000 + $9820).
* Investing your $80,000 at 8% will yield $172,714, which after tax is worth $146,754.

Now your original $100,000 is worth $29,820(equity) + $146,754(investment) - $43,645 (loan interest) = $132,929. Plus you have your home and access to your money if needed.

You're $32,929 richer than if you paid cash for your home, even though you paid all that interest!

It's not without risk so let me point out the following:
1. You can't do this by putting your money in a bank savings account at 4-5% interest so there's a higher risk associated with investments like mutual funds.
2. If you don't like to be in debt, don't do this.
3. Of course, you've got to have the cash first.
4. If recent history is any indication, you should be able to obtain a greater return than 8% on investments. 10-15% would not be unusual, but the higher returns carry a greater risk of loss.
5. Definitely contact your financial advisor before doing this.