I'm buying a new home, is a bigger downpayment better?

I have inherited some money and I am considering buying a condo. Is it better to use the money towards a larger downpayment and a smaller mortgage or should I go with a smaller downpayment and invest some of the money?

It is hard to answer this question without knowing more about your situation. For example, how much do you earn and what does your debt level look like? The general rule is that the principal, interest, taxes and insurance (PITI) payment on the house should not be more than 28 percent of your monthly gross income. So, if you make $75,000 per year, your monthly mortgage payment including homeowners insurance and property taxes should not be more than $1,750.

You also need to consider your other long term debt. The total of all your long term debt should be less than 36 percent of your monthly gross income. That means the PITI payment I mentioned above PLUS all your other long term debt, like car payments and student loan payments, should not exceed $2,250.

You should plan to make a downpayment large enough to meet these ratios. If that amounts to less than 20 percent of the cost of the home, I would increase the downpayment to get to 20 percent so you can also avoid Private Mortgage Insurance (PMI). Beyond that, if the payments are very manageable, I usually don't suggest super large downpayments. I like the flexibility of having cash available for other needs. For example, if you don't already have an emergency fund in place, I would use some of the money to get one set up. Also, if you are behind on your retirement savings, I would recommend increasing your savings by contributing fully to your IRA and 401(k).

Mortgage rates are certainly higher than they were a few years ago, but they are still at historic lows. If someone is willing to lend me money for 30 years at a rate of 6 percent or lower, I think that is a good deal. Looking out over the long term, I think I have a very good chance of earning that amount and higher by investing in the market so I wouldn't want all my money tied up in the house.