Thread: Sales Tax Question

Originally Posted by gophils86

I know the general rule of thumb is to put down 20% when buying a house/condo/ect. However, does the 20% include sales tax?

For an example, the place is listed at $115,000 and I live in NJ (7% sales tax).

20% of $115,000 = $23,000
$115,000 - $23,000 = $92,000 left
$92,000 x .07 = $6,440
$92,000 + $6,440 = $98,440
$98,440 is mortaged over 15 years fixed & $23,000 is put down.

OR

$115,000 x .07 = $8050
$115,000 + $8,050 = $123,050
20% of $123,050 = $24,610
$123,050 - $24,610 = $98,440
$98,440 is mortaged over 15 years fixed & $24,610 is put down.

Ok, so it looks like $98,440 is whats going to be mortgaged, but what 20% is needed to put down ($23,000 or $24,610)?

I know a number of states charge an excise tax on real estate sales but the worst I have run into was Washington state. They had an excise tax of 1.78% and it was charged to the sellers. I would be very suprised if in Jersey they had a 7% sales tax charged on real property sales. So, you should check into what the actually fees are in a purchase. Now as for down payment amount you really won't see a meaningful difference in your payment between putting down $23,000 or $24,610. For this reason don't worry about it.

Now you said that you have been told that you should put 20% down, the only benefits to this is a reduced interest rate. At most put down whatever amount gives you the best interest rates. I have always believed that you should put down as little as you possible can and still comfortably be able to make the mortgage payment. This is because the less money you have invested the less you can possible loose and second the less you have invested the more leverage you have in the purchase. Leverage allows you to earn higher than normal returns on your money. If you are confused by the latter part of this post feel free to ask any questions you feel inclined to.

I thought if you didn't put down atleast 20%, you had to pay mortgage insurance?

Originally Posted by gophils86

I thought if you didn't put down atleast 20%, you had to pay mortgage insurance?

In most cases you do but mortgage insurance is not that much and can be avoided with a second mortgage that brings the first mortgage down to 80%. In fact you can arrange a loan that has less than a quarter of a percent difference in rate with a 60/35 piggy back loan. Alot of lenders give another break on interest rate at 60% loan to value. A piggy back loan is one in which you have a first mortgage(in our discussion first loan at 60% loan to value) and a second mortgage(35% in the example here). With this kind of loan you get to keep your cash and avoid mortgage insurance. On top of this you can pay down the second loan and then you are left with a first mortgage at the best possible rates available. I do need to note that for a loan of this type to be available to you, you will have to have excellent credit.