100% Financing?

I'm a first time home buyer, I make a decent income (80k/year) and have been on my job 5 years. I have savings and a 401k but don't want to use it for a down payment because I believe I can earn more with investments. I'm looking at a property around $375,000. I heard about Fannie Mae and I'm pretty sure I can quallify for a good rate. My credit score is 710. If I can earn 8% on my investments wouldn't it be better to do 100% financing if I plan on keeping the house?

Your logic is sound here. Currently with Fannie Mae, you can get 100% financing around 5.875% with the proper financial profile. It sounds as if you have put some thought into this and I commend you for that. The fact that you plan on keeping your home long term makes a big difference in determining if 100% financing is a good idea, and in your case, it could be.

Assuming that the housing market rebounds and if houses started appreciating at a rate higher than what you can get on your investments (8%), then you would always have the option to pay down principal with your liquid assets. By all means look into Fannie Mae / Freddie Mac financing and don't forget about FHA with as little as 3% down. FHA will get you a hair better rate than 100% Fannie Mae so you might want to weigh the benefit of that. With 20% down and a 680 credit score (which you have) you can get even better rates. Find a licensed, BBB accredited broker and have them do a side-by-side comparison of all of the programs for you.

Edit and question to Spock:

Please explain why it does not make sense to finance 100% and at a later time when appreciation seems more likely, make that same 20% payment to principal. Why isn't that the same or better leaving the liquid assets available and drawing 8% in the interim? Yes the 8% might not actually be 8% depending on their tax position but you still can write off the interest.

First and foremost, never use 401k savings unless you need to avoid a foreclosure.

However, if you get 100% financing, you basically leave yourself with very little equity in your home. Also too, you may have to pay PMI, which is mortgage insurance to the lender (that doesn't always happen with 80/20)

If you have a substantial amount of savings, I would suggest using it as a down payment, investing it to make the return in your case, is not a sensible one.

i suggest sharpening your pencil

8% if it is subject to income taxes may not help you much, esp. if you are not close to itemizing deductions already.

here's how I'd figure:

1. Hillary/Obama is going to raise tax rates on you. by their standards, you're "rich". [over 75k/yr and single]

2. pretend to itemize deductions on your 2007 return [if you aren't already]. then add estimated real estate taxes for the target house in your area. ... this is the level of itemization you already have without the interest deduction.

if you aren't already itemizing deductions, deduct this as if figure from the standard deduction.

you'll get no tax benefit from itemizing on this much of your interest expense.

then figure the after tax effective interest rate on the loan. compare to your after tax return on your investments [don't touch the 401k]

if these figures are close together, as I suspect they might be, you have a tough decision.

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my personal principle in these matters is to pay down the debt, or make bigger down payment, if my estimated net yield isn't at least twice my estimated net cost [both in percent].

I do this because income returns are chancy while the debt payment is certain. I have to have the funds to make my debt payment even in years when my investing isn't as prosperous as my average return.