Invest in (say, index funds) vs spending all money on home?
Rules of thumb? Sure - Put down 20% to pay no PMI.  The mortgage payment (including property tax) should be no more than 28% of your gross monthly income.  These two rules will certainly put a cap on the home price. If you have more than the 20% to put down on the house you like, stop right here. Don't put more down and don't buy a bigger house. Set that money aside for long term investing (i.e. retirement savings) or your emergency fund. You can always make extra payments and shorten the length of the mortgage, you just can't easily get it back.  In my opinion, one is better off getting a home that's too small and paying the transaction costs to upsize 5-10 years later than to buy too big, and pay all the costs associated with the home for the time you are living there. The mortgage, property tax, maintenance, etc. The too-big house can really take it toll on your wallet. The short answer is that it depends on the taxation laws in your country. The long answer is that there are usually tax avoidance mechanisms that you can use which may make it more economically feasible for you to go one way or the other. Consider the following: The long term average growth rate of the stock market in Australia is around 7%.  The average interest on a mortgage is 4.75%.  Assuming you have money left over from a 20% deposit, you have a few options.  You could: 1) Put that money into an index fund for the long term, understanding that the market may not move for a decade, or even move downwards; 2) Dump that money straight into the mortgage; 3) Put that money in an offset account Option 1 will get you (over the course of 30-40 years) around 7% return.  If and when that profit is realised it will be taxed at a minimum of half your marginal tax rate (probably around 20%, netting you around 5.25%) Option 2 will effectively earn you 4.75% pa tax free Option 3 will effectively earn you 4.75% pa tax free with the added bonus that the money is ready for you to draw upon on short notice. Of the three options, until you have a good 3+ months of living expenses covered, I'd go with the offset account every single time. Once you have a few months worth of living expenses covered, I would the adopt a policy of spreading your risk.  In Australia, that would mean extra contributions to my Super (401k in the US) and possibly purchasing an investment property as well (once I had the capital to positively gear it). Of course, you should find out more about the tax laws in your country and do your own maths. "Here in the UK, the rule of thumb is to keep a lot of equity in your home if you can. I assume here that you have a lot of savings you're considering using. If you only have say 10% of the house price you wouldn't actually have a lot of choice in the matter, the mortgage lender will penalise you heavily for low deposits. The practical minimum is 5%, but for most people a 95% mortgage is just silly (albeit not as silly as the 100% or greater mortgages you could get pre-2008), and you should take serious individual advice before considering it. According to Which, the average in the UK for first-time buyers is 20% (not the best source for that data I confess, but a convenient one). Above 20% is not at all unusual. You'll do an affordability calculation to figure out how much you can borrow, which isn't at all the same as how much you should borrow, but does get you started. Basically you, decide how much a month you can spend on mortgage payments. The calculation will let you put every penny into this if you choose to, but in practice you'll want some discretionary income so don't do that. decide the term of the mortgage. For a young first-time buyer in the UK I think you'd typically take a 25-year term and consider early repayment options rather than committing to a shorter term, but you don't have to. Mortgage lenders will offer shorter terms as long as you can afford the payments. decide how much you're putting into a deposit make subtractions for cost of moving (stamp duty if applicable, fees, removals aka ""people to lug your stuff""). receive back a number which is the house price you can pay under these constraints (and of course a breakdown of what the mortgage principle would be, and the interest rate you'll pay). This step requires access to lender information, since their rates depend on personal details, deposit percentage, phase of the moon, etc. Our mortgage advisor did multiple runs of the calculation for us for different scenarios, since we hadn't made up our minds entirely. Since you have not yet decided how much deposit to make, you can use multiple calculations to see the effect of different deposits you might make, up to a limit of your total savings. Putting up more deposit both increases the amount you can borrow for a given monthly payment (since mortgage rates are lower when the loan is a lower proportion of house value), and of course increases the house price you can afford. So unless you're getting a very high return on your savings, £1 of deposit gets you somewhat more than £1 of house, and the calculation will tell you how much more. Once you've chosen the house you want, the matter is even simpler: do you prefer to put your savings in the house and borrow less and make lower payments, or prefer to put your savings elsewhere and borrow more and make higher payments but perhaps have some additional income from the savings. Assuming you maintain a contingency fund, a lower mortgage is generally considered a good investment in the UK, but you need to check what's right for you and compare it to other investments you could make. The issue is complicated by the fact that residential property prices are rising quite quickly in most areas of the UK, and have been for a long time, meaning that highly-leveraged property investment appears to be a really good idea. This leads to the imprudent, but tempting, conclusion that you should buy the biggest house you can possibly afford and watch its value rises. I do not endorse this advice personally, but it's certainly true that in a sharply rising house market it's easier to get away with buying a bigger house than you need, than it is to get away with it in a flat or falling market. As Stephen says, an offset mortgage is a no-brainer good idea if the rate is the same. Unfortunately in the UK, the rate isn't the same (or anyway, it wasn't a couple of years ago). Offset mortgages are especially good for those who make a lot of savings from income and for any reason don't want to commit all of those savings to a traditional mortgage payment. Good reasons for not wanting to do that include uncertainty about your future income and a desire to have the flexibility to actually spend some of it if you fancy :-)"
Let me add a few thoughts that have not been mentioned so far in the other answers.  Note that for the decision of buying vs. renting a home i.e. for personal use, not for renting out there's a rule of thumb that if the price for buying is more than 20 year's (cold) rents it is considered rather expensive. I don't know how localized this rule of thumb is, but I know it for Germany which is apparently the OP's country, too. There are obviously differences between buying a house/flat for yourself and in order to rent it out. As others have said, maintenance is a major factor for house owners - and here a lot depends on how much of that you do yourself (i.e. do you have the possibility to trade working hours for costs - which is closely related to financial risk exposure, e.g. increasing income by cutting costs as you do maintenance work yourself if you loose your day-time job?).  This plays a crucial role for landlords I know (they're all small-scale landlords, and most of them do put in substantial work themselves): I know quite a number of people who rent out flats in the house where they actually live. Some of the houses were built with flats and the owner lives in one of the flats, another rather typical setup is that people built their house in the way that a smaller flat can easily be separated and let once the kids moved out (note also that the legal situation for the landlord is easier in that special case). I also know someone who owns a house several 100 km away from where they live and they say they intentionally ask a rent somewhat below the market price for that (nice) kind of flat so that they have lots of applicants at the same time and tenants don't move out as finding a new tenant is lots of work and costly because of the distance.   My personal conclusion from those points is that as an investment (i.e. not for immediate or future personal use) I'd say that the exact circumstances are very important: if you are (stably) based in a region where the buying-to-rental-price ratio is favorable, you have the necessary time and are able to do maintenance work yourself and there is a chance to buy a suitable house closeby then why not. If this is not the case, some other form of investing in real estate may be better. On the other hand, investing in further real estate closeby where you live in your own house means increased lump risk - you miss diversification into regions where the value of real estate may develop very differently.  There is one important psychological point that may play a role with the observed relation between being rich and being landlord. First of all, remember that the median wealth (without pensions) for Germany is about 51 k€, and someone owning a morgage-free 150 k€ flat and nothing else is somewhere in the 7th decile of wealth. To put it the other way round: the question whether to invest 150 k€ into becoming a landlord is of practical relevance only for rich (in terms of wealth) people. Also, asking this question is typically only relevant for people who already own the home they live in as buying for personal use will typically have a better return than buying in order to rent. But already people who buy for personal use are on average wealthier (or at least on the track to become more wealthy in case of fresh home owners) than people who rent. This is attributed to personal characteristics and the fact that the downpayment of the mortgage enforces saving behaviour (which is typically kept up once the house is paid, and is anyways found to be more pronounced than for non-house-owners). In contrast, many people who decide never to buy a home fall short of their initial savings/investment plans (e.g. putting the 150 k€ into an ETF for the next 21 years) and in the end spend considerably more money - and this group of people rarely invests into directly becoming a landlord.  Assuming that you can read German, here's a relevant newspaper article and a related press release. Certainly, paying off the mortgage is better than doing nothing with the money. But it gets interesting when you consider keeping the mortgage and investing the money. If the mortgage rate is 5% and you expect >5% returns from stocks or some other investment, then it might make sense to seek those higher returns. If you expect the same 5% return from stocks, keeping the mortgage and investing the money can still be more tax-efficient. Assuming a marginal tax rate of 30%, the real cost of mortgage interest (in terms of post-tax money) is 3.5%*. If your investment results in long-term capital gains taxed at 15%, the real rate of growth of your post-tax money would be 4.25%. So in post-tax terms, your rate of gain is greater than your rate of loss. On the other hand, paying off the mortgage is safer than investing borrowed money, so doing so might be more appropriate for the risk-averse. * I'm oversimplifying a bit by assuming the deduction doesn't change your marginal tax rate. Keep in mind, this is a matter of preference, and the answers here are going to give you a look at the choices and the member's view on the positive/negative for each one.  My opinion is to put 20% down (to avoid PMI) if the bank will lend you the full 80%. Then, buy the house, move in, and furnish it. Keep track of your spending for 2 years minimum. It's the anti-budget. Not a list of constraints you have for each category of spending, but a rear-view mirror of what you spend. This will help tell you if, in the new house, you are still saving well beyond that 401(k) and other retirement accounts, or dipping into that large reserve.  At that point, start to think about where kids fit into your plans. People in million dollar homes tend to have child care that's 3-5x the cost the middle class has. (Disclosure - 10 years ago, our's cost $30K/year).  Today, your rate will be about 4%, and federal marginal tax rate of 25%+, meaning a real cost of 3%. Just under the long term inflation rate, 3.2% over the last 100 years. I am 53, and for my childhood right through college, the daily passbook rate was 5%. Long term government debt is also at a record low level. This is the chart for 30 year bonds.  I'd also suggest you get an understanding of the long term stock market return. Long term, 10%, but with periods as long as 10 years where the return can be negative.  Once you are at that point, 2-3 years in the house, you can look at the pile of cash, and have 3 choices.  We are in interesting times right now. For much of my life I'd have said the potential positive return wasn't worth the risk, but then the mortgage rate was well above 6-7%. Very different today. 4) Beef up my emergency fund, make sure my 401(k) or IRA was fully funded, put the rest into investments. See many past answers. A house you are living in is not an investment. It is a purchase, just as rental is a purchase. Buying a house to rent out is starting a business. If you want to spend the ongoing time and effort and cash running a business, and if you can buy at the right time in the right place for the righr price, this can be a reasonable investment. If you aren't willing to suffer the pains of being a landlord, it's less attractive; you can hire someone to manage it for you but that cuts the income significantly. Starting a business: Remember that many, perhaps most, small businesses fail. If you really want to run a business it can be a good investment, again assuming you can buy at the right time/price/place and are willing and able to invest the time and effort and money to support the business.  Nothing produces quick return with low risk. A loan with modest interest is better than paying by cash if there are better alternatives for investment. For example, suppose you are buying a house. Consider two extremes: a) you pay the house entirely by cash, b) the entire buy is financed by the bank.  Historically, real (subtracting inflation) house prices (at least in the U.S.) have not risen at all in the long run, and investing all of your own capital in this way may not be optimal. Notice that we are looking at a situation where one is buying a house and living in it in any case. Rent savings are equal in cases a) and b). If instead you were buying a house not for yourself, but as a separate investment for renting out, then you would receive rent. In the case a), the real return on your capital will be zero, whereas in case b), you can invest the cash in e.g. the stock market and get, on average, 7% (the stock market has yielded a 7% real return annually including dividends)  annually minus the bank's interest rate. If the interest is lower than 7%, it may be profitable to take the loan. Of course, the final decision depends on your risk preferences. "From what I've read, paying down your mortgage -- above and beyond what you'd normally pay -- is indeed an investment but a very poor form of investment. In other words, you could take that extra money you'd apply towards your mortgage and put it in something that has a much higher rate of return than a house. As an extreme example, consider: if I took $6k extra I would have paid toward my mortgage in a single year, and bought a nice performing stock, I could see returns of 2x or 3x. Now, that implies I know which stock to pick, etcetera.. I found a ""mortgage or investment"" calculator which could be of use as well: http://www.planningtips.com/cgi-bin/prepay_v_invest.pl (scroll to bottom to see the summary and whether or not prepay or invest wins for the numbers you plugged in)" Investing in property hoping that it will gain value is usually foolish; real estate increases about 3% a year in the long run.  Investing in property to rent is labor-intensive; you have to deal with tenants, and also have to take care of repairs.  It's essentially getting a second job. I don't know what the word pension implies in Europe; in America, it's an employer-funded retirement plan separate from personally funded retirement.  I'd invest in personally funded retirement well before buying real estate to rent, and diversify my money in that retirement plan widely if I was within 10-20 years of retirement. The big question is whether you will be flexible about when you'll get that house. The overall best investment (in terms of yielding a good risk/return ratio and requiring little effort) is a broad index fund (mutual or ETF), especially if you're contributing continuously and thereby take advantage of cost averaging. But the downside is that you have some volatility: during an economic downturn, your investment may be worth only half of what it's worth when the economy is booming. And of course it's very bad to have that happening just when you want to get your house. Then again, chances are that house prices will also go down in such times. If you want to avoid ever having to see the value of your investment go down, then you're pretty much stuck with things like your high-interest savings account (which sounds like a very good fit for your requirements. My figuring (and I'm not an expert here, but I think this is basic math) is: Let's say you had a windfall of $1000 extra dollars today that you could either: a. Use to pay down your mortgage b. Put into some kind of equity mutual fund Maybe you have 20 years left on your mortgage.  So your return on investment with choice A is whatever your mortgage interest rate is, compounded monthly or daily.  Interest rates are low now, but who knows what they'll be in the future.  On the other hand, you should get more return out of an equity mutual fund investment, so I'd say B is your better choice, except: But that's also the other reason why I favour B over A.  Let's say you lose your job a year from now.  Your bank won't be too lenient with you paying your mortgage, even if you paid it off quicker than originally agreed.  But if that money is in mutual funds, you have access to it, and it buys you time when you really need it.  People might say that you can always get a second mortgage to get the equity out of it, but try getting a second mortgage when you've just lost your job. what other pieces of info should I consider If you don't have liquid case available for unexpected repairs, then you probably don't want to use this money for either option.  The 7% return on the stocks is absolutely not guaranteed. There is a good amount of risk involved with any stock investment. Paying down the mortgage, by contrast, has a much lower risk. In the case of the mortgage, you know you'll get a 2.1% annual return until it adjusts, and then you can put some constraints on the return you'll get after it adjusts. In the case of stocks, it's reasonable to guess that it will return more than 2.1% annually if you hold it long enough. But there will be huge swings from month to month and from year to year. The sooner you need it, the more guaranteed you will want the return to be. If you have few or no stock (or bond)-like assets, then (nearly) all of your wealth is in your house, and that is independent of the remaining balance on your mortgage. If you are going to sell the house soon, then you will want to diversify your assets to protect you against a drop in home value. If you are going to stay in the house forever, then you will eventually need non-house assets to consume. Ultimately, neither option is inherently better; it really depends on what you need. A lot of people on here will likely disagree with me and this opinion.   In my opinion the answer lies in your own motives and intentions.   If you'd like to be more cognizant of the market, I'd just dive in and buy a few companies you like.  Many people will say you shouldn't pick your own stocks, you should buy an index fund, or this ETF or this much bonds, etc.  You already have retirement savings, capital allocation is important there.  You're talking about an account total around 10% of your annual salary, and assuming you have sufficient liquid emergency funds; there's a lot of non-monetary benefit to being more aware of the economy and the stock market.  But if you find the house you're going to buy, you may have to liquidate this account at a time that's not ideal, possibly at a loss. If all you're after is a greater return on your savings than the paltry 0.05% (or whatever) the big deposit banks are paying, then a high yield savings account is the way I'd go, or a CD ladder. Yes, the market generally goes up but it doesn't ALWAYS go up.  Get your money somewhere that it's inured and you can be certain how much you'll have tomorrow. Assuming a gain, the gain you'll see will PALE in comparison to the deposits you'll make.  Deposits grow accounts.  Consider these scenarios if you allocate $1,000 per month to this account.   1) Assuming an investment return of 5% you're talking about $330 return in the first year (not counting commissions or possible losses). 2) Assuming a high yield savings account at 1.25% you're talking about $80 in the first year.   Also remember, both of these amounts would be taxable. I'll admit in the event of 5% return you'll have about four times the gain but you're talking about a difference of ~$250 on $12,000.  Over three to five years the most significant contributor to the account, by far, will be your deposits.   Anyway, as I'm sure you know this is not investment advice and you may lose money etc. "With no numbers offered, it's not like we can tell you if it's a wise   purchase. -- JoeTaxpayer We can, however, talk about the qualitative tradeoffs of renting vs owning. The major drawback which you won't hear enough about is risk. You will be putting a very large portion of your net worth in what is effectively a single asset. This is somewhat risky. What happens if the regional economy takes a hit, and you get laid off? Chances are you won't be the only one, and the value of your house will take a hit at the same time, a double-whammy. If you need to sell and move away for a job in another town, you will be taking a financial hit - that is, if you can sell and still cover your mortgage. You will definitely not be able to walk away and find a new cheap apartment to scrimp on expenses for a little while. Buying a house is putting down roots. On the other hand, you will be free from the opposite risk: rising rents. Once you've purchased the house, and as long as you're living in it, you don't ever need to worry about a local economic boom and a bunch of people moving into town and making more money than you, pushing up rents. (The San Francisco Bay Area is an example of where that has happened. Gentrification has its malcontents.) Most of the rest is a numbers game. Don't get fooled into thinking that you're ""throwing away"" money on renting - if you really want to, you can save money yourself, and invest a sum approximately equal to your down payment in the stock market, in some diversified mutual funds, and you will earn returns on that at a rate similar to what you would get by building equity in your home. (You won't earn outsized housing-bubble-of-2007 returns, but you shouldn't expect those in the housing market of today anyway.) Also, if you own, you have broad discretion over what you can do with the property. But you have to take care of the maintenance and stuff too." "To add to what other have stated, I recently just decided to purchase a home over renting some more, and I'll throw in some of my thoughts about my decision to buy. I closed a couple of weeks ago. Note that I live in Texas, and that I'm not knowledgeable in real estate other than what I learned from my experiences in the area when I am located. It depends on the market and location. You have to compare what renting will get you for the money vs what buying will get you. For me, buying seemed like a better deal overall when just comparing monthly payments. This is including insurance and taxes. You will need to stay at a house that you buy for at least 5-7 years. You first couple years of payments will go almost entirely towards interest. It takes a while to build up equity. If you can pay more towards a mortgage, do it. You need to have money in the bank already to close. The minimum down payment (at least in my area) is 3.5% for an FHA loan. If you put 20% down, you don't need to pay mortgage insurance, which is essentially throwing money away. You will also have add in closing costs. I ended up purchasing a new construction. My monthly payment went up from $1200 to $1600 (after taxes, insurance, etc.), but the house is bigger, newer, more energy efficient, much closer to my work, in a more expensive area, and in a market that is expected to go up in value. I had all of my closing costs (except for the deposit) taken care of by the lender and builder, so all of my closing costs I paid out of pocket went to the deposit (equity, or the ""bank""). If I decide to move and need to sell, then I will get a lot (losing some to selling costs and interest) of the money I have put in to the house back out of it when I do sell, and I have the option to put that money towards another house. To sum it all up, I'm not paying a difference in monthly costs because I bought a house. I had my closing costs taking care of and just had to pay the deposit, which goes to equity. I will have to do maintenance myself, but I don't mind fixing what I can fix, and I have a builder's warranties on most things in the house.  To really get a good idea of whether you should rent or buy, you need to talk to a Realtor and compare actual costs. It will be more expensive in the short term, but should save you money in the long term." "For some people, it should be a top priority.  For others, there are higher priorities.  What it should be for you depends on a number of things, including your overall financial situation (both your current finances and how stable you expect them to be over time), your level of financial ""education"", the costs of your mortgage, the alternative investments available to you, your investing goals, and your tolerance for risk. Your #1 priority should be to ensure that your basic needs (including making the required monthly payment on your mortgage) are met, both now and in the near future, which includes paying off high-interest (i.e. credit card) debt and building up an emergency fund in a savings or money-market account or some other low-risk and liquid account.  If you haven't done those things, do not pass Go, do not collect $200, and do not consider making advance payments on your mortgage.  Mason Wheeler's statements that the bank can't take your house if you've paid it off are correct, but it's going to be a long time till you get there and they can take it if you're partway to paying it off early and then something bad happens to you and you start missing payments.  (If you're not underwater, you should be able to get some of your money back by selling - possibly at a loss - before it gets to the point of foreclosure, but you'll still have to move, which can be costly and unappealing.)  So make sure you've got what you need to handle your basic needs even if you hit a rough patch, and make sure you're not financing the paying off of your house by taking a loan from Visa at 27% annually. Once you've gotten through all of those more-important things, you finally get to decide what else to invest your extra money in.  Different investments will provide different rewards, both financial and emotional (and Mason Wheeler has clearly demonstrated that he gets a strong emotional payoff from not having a mortgage, which may or may not be how you feel about it).  On the financial side of any potential investment, you'll want to consider things like the expected rate of return, the risk it carries (both on its own and whether it balances out or unbalances the overall risk profile of all your investments in total), its expected costs (including its - and your - tax rate and any preferred tax treatment), and any other potential factors (such as an employer match on 401(k) contributions, which are basically free money to you).  Then you weigh the pros and cons (financial and emotional) of each option against your imperfect forecast of what the future holds, take your best guess, and then keep adjusting as you go through life and things change. But I want to come back to one of the factors I mentioned in the first paragraph.  Which options you should even be considering is in part influenced by the degree to which you understand your finances and the wide variety of options available to you as well as all the subtleties of how different things can make them more or less advantageous than one another.  The fact that you're posting this question here indicates that you're still early in the process of learning those things, and although it's great that you're educating yourself on them (and keep doing it!), it means that you're probably not ready to worry about some of the things other posters have talked about, such as Cost of Capital and ROI.  So keep reading blog posts and articles online (there's no shortage of them), and keep developing your understanding of the options available to you and their pros and cons, and wait to tackle the full suite of investment options till you fully understand them. However, there's still the question of what to do between now and then.  Paying the mortgage down isn't an unreasonable thing for you to do for now, since it's a guaranteed rate of return that also provides some degree of emotional payoff.  But I'd say the higher priority should be getting money into a tax-advantaged retirement account (a 401(k)/403(b)/IRA), because the tax-advantaged growth of those accounts makes their long-term return far greater than whatever you're paying on your mortgage, and they provide more benefit (tax-advantaged growth) the earlier you invest in them, so doing that now instead of paying off the house quicker is probably going to be better for you financially, even if it doesn't provide the emotional payoff.  If your employer will match your contributions into that account, then it's a no-brainer, but it's probably still a better idea than the mortgage unless the emotional payoff is very very important to you or unless you're nearing retirement age (so the tax-free growth period is small).  If you're not sure what to invest in, just choose something that's broad-market and low-cost (total-market index funds are a great choice), and you can diversify into other things as you gain more savvy as an investor; what matters more is that you start investing in something now, not exactly what it is. Disclaimer: I'm not a personal advisor, and this does not constitute investing advice.  Understand your choices and make your own decisions." I think there are a few facets to this, namely: Overall, I wouldn't concentrate on paying off the house if I didn't have any other money parked and invested, but I'd still try to get rid of the mortgage ASAP as it'll give you more money that you can invest, too. At the end of the day, if you save out paying $20k in interest, that's almost $20k you can invest. Yes, I realise there's a time component to this as well and you might well get a better return overall if you invested the $20k now that in 5 years' time. But I'd still rather pay off the house.