Financial Planning / The Compound Effect

How Much Should You Put Down On A House? The $400,000 Question

2026-07-17 | 8 min | By Heath J. Harris

A friend sold his house with $400,000 in gains and asked whether to sink it all into the next one. The honest math on down payment size, in four charts.

A college friend called me a few weeks ago with a good problem. He sold his house this spring, cleared about $400,000 in gains, and moved into a rental with his new wife. Now he wants to know the right down payment when they buy the next place: all $400,000 of it, or something smaller with the rest invested?

He is in no hurry. Prices in his area still feel stretched, the rental suits them, and nothing is forcing a move. At Compound Advisory this question shows up in client meetings every month, usually right after a home sale or an inheritance. So I built him the numbers on a $1,000,000 purchase. Some of them surprised me.

Is a $400,000 home-sale gain even taxable?

Start with the money he is holding. Married couples filing jointly can exclude up to $500,000 of gain on the sale of a primary residence under Section 121, and single filers up to $250,000. The catch for newlyweds: the full $500,000 requires both spouses to have used the home as their main residence for two of the five years before the sale, even though only one needs to be on the title. If his wife hit that two-year mark, the entire $400,000 comes out tax-exempt. If she moved in more recently, $250,000 comes out clean and the rest faces capital gains rates. That one question can swing the outcome by tens of thousands of dollars, and a tax planning review settles it before the return gets filed.

Waiting costs him nothing right now

The 2026 housing market rewards patience. National asking rents have fallen for 35 consecutive months. Home prices rose 0.8% over the past year on the Case-Shiller national index, which means they fell after inflation. Redfin counted 48.5% more sellers than buyers in June, and Bankrate's affordability study found renting cheaper than a typical mortgage payment in all 50 of the largest U.S. metros.

Parked in Treasury bills at about 3.9%, his $400,000 earns roughly $15,600 a year with no risk to principal while they shop. Renting a home comparable to a $1,000,000 purchase runs about $4,200 a month against roughly $5,900 to own one. He can afford to be picky, and picky is the correct mood in a buyer's market.

How much should you put down on a house?

Now the comparison he asked for on a $1,000,000 home: $400,000 down versus $100,000 down with the other $300,000 left invested.

The down payment does more than shrink the loan. It changes the price of the loan. The 2026 conforming limit is $832,750, so borrowing $900,000 pushes the whole mortgage into jumbo pricing, roughly 0.2 points above the 6.55% national average 30-year rate. Putting 10% down also adds private mortgage insurance of about $300 a month, which sticks around for roughly eight years until the balance amortizes down to 80% of the purchase price.

The monthly gap between the two paths comes to $2,325. Where that difference goes determines the winner.

The 20-year race, run fairly

Most versions of this comparison cheat. They hand the small-down-payment buyer a $300,000 portfolio and ignore that the big-down-payment buyer pays $2,325 less every month. So I ran it on equal cash flow: both households spend identical dollars each month, and the $400K-down household invests its monthly savings into the same portfolio earning the same return.

At a 7% return the race ends in a photo finish: roughly $2.47 million on both paths after 20 years, a $4,000 difference on nearly two and a half million. At 11%, the kind of extended run the S&P 500 has delivered before, the smaller down payment wins by more than half a million. The tax code is doing quiet work inside both panels, and it deserves its own accounting.

Two grounding numbers sit under those curves. The house itself, growing at a modest 3% (well under its 4.3% long-run average), reaches about $1.81 million in 20 years; at 2% it reaches $1.49 million. And measured against the $400,000 they start with, either path grows total net worth by roughly $2.1 million over those 20 years at a 7% return. The down payment question moves the outcome by tens of thousands. Buying a sensible house at a sensible price, then staying invested, moves it by millions.

The last $300,000 you borrow is the most expensive

The extra $300,000 of mortgage does its damage in three places at once:

• Jumbo pricing on the whole loan. The rate premium applies to all $900,000, so the marginal cost of the extra borrowing runs near 7.2% before anything else is counted.
• PMI. About $29,000 over eight years, stacked on top of the interest.
• A capped deduction. Mortgage interest is deductible only on the first $750,000 of the loan, so on a $900,000 mortgage more than $10,000 of first-year interest earns no deduction at all. The PMI deduction Congress revived for 2026 phases out above $109,000 of income, so buyers at this price point see none of it.

Stack those three and the marginal borrowing costs about 8.5% a year before taxes. Then the deduction hands part of it back: the bigger loan writes off about $11,600 more interest in year one, worth roughly $300 a month to an itemizing household in the 32% bracket. Net everything out and the monthly difference between the two paths is about $2,000 after taxes, not the $2,325 on the mortgage statements, and the true hurdle on "invest the difference" lands near 7% if you itemize. Take the standard deduction, as most households do, and the extra interest buys you nothing: the hurdle climbs back toward 9%.

The S&P 500 has compounded at about 10% a year over the past century, so history clears either bar. A plan that requires the historical average to arrive on schedule, financed with a bigger mortgage, is a different animal from a plan that merely hopes for it. Leverage works in both directions, and it does not care which direction you had in mind.

What if the account pays the difference itself?

My friend asked the sharpest version of the question: why not let the $300,000 do the paying? Put $100,000 down, and each month sell just enough from the account to cover the roughly $2,000 after-tax difference. Both households then write identical checks, and the account either outruns the withdrawals or it does not.

That chart is the entire decision in one picture. At 7%, the account spends twenty-nine years paying the difference and runs dry just before the mortgage does; you arrive almost exactly where the $400,000-down buyer arrived, having carried three decades of extra leverage to get there. At 11%, the account never breaks a sweat and finishes near $1.7 million. Nobody knows in advance which line they will live in, and a rough first decade behaves worse than either curve.

The Florida wrinkle

He is buying in Florida, which bends the arithmetic in three places. With no state income tax, his SALT deduction is property tax plus a sales-tax allowance, about $17,000, nowhere near the $40,400 cap; mortgage interest still pushes him well past the standard deduction, so the math above holds. Florida also taxes the mortgage itself: documentary stamps and intangible tax come to about $4,950 on the $900,000 note versus $3,300 on the $600,000 one, so the small down payment costs an extra $1,650 at the closing table. Florida homeowners insurance runs far above the national average, roughly $10,000 a year on a $1 million home away from the coast and double that on it, with flood coverage separate, and property taxes reset at purchase: the low effective rates you see quoted belong to longtime owners protected by the Save Our Homes cap, while a fresh $1 million purchase in a major metro starts near $15,000 a year. One offset if you just sold a Florida homestead: you can port up to $500,000 of that assessment protection to the next home, but only within three years, which puts a quiet deadline on "no rush." The market is on his side, though: home values are falling year over year in 22 of the 50 largest metros, and Florida markets like Cape Coral and Tampa are leading the declines. Patience is a Florida strategy right now.

Where I landed with him

Numbers this close mean the decision turns on things a spreadsheet cannot hold: job security, how each of you sleeps during a 30% drawdown, whether the cash cushion matters more than the optimized outcome. Money in a brokerage account can replace a roof or bridge a layoff next month. Money inside your walls needs a loan officer's permission to come back out.

So here is the decision, stated plainly. For my friend: $200,000 down, the other $200,000 invested. Twenty percent removes PMI on day one, and the $800,000 loan stays under the conforming limit, so it dodges jumbo pricing too. Principal and interest run about $5,083 a month, the tax deduction stays fully intact under the $750,000 cap, and $200,000 remains invested and reachable. The maximum-leverage path only earns its risk if you genuinely expect 10% or better for decades and can watch a levered portfolio drop 30% without flinching; the all-cash-down path is the right answer when the mortgage keeps you up at night. One more reason not to overshoot on the house itself: selling later costs about 5.4% in commissions plus transfer taxes, so a "for now" house is an expensive rental.

If you are sitting on home-sale proceeds and staring at the same decision, this is the modeling we run inside an investment plan. From our home base in Annapolis, Maryland, we work with clients virtually across all 50 states. Book a complimentary Retirement Clarity Assessment → and we will build your version of these charts.

Buy the house when you find the right house. Choose the down payment on purpose.

Heath

Compound Advisory is a registered investment advisor. This content is educational and is not individualized investment, tax, or legal advice. The scenarios above are hypothetical illustrations, not predictions; actual rates, returns, and tax outcomes will differ. Past performance is not indicative of future results. All investing involves risk, including the possible loss of principal.

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