When Saving Up For A Big Down Payment Does Not Make Sense

Saving up to buy a home down the road? That might make sense from a personal financial planning perspective, but from a pragmatic approach to actually getting your foot in the door you may want to reconsider your position. What to consider…

In most cases your ability to save is going to be at a much slower pace than the rate of appreciation of homes around your area. Put simply, if home prices in your area are on the rise, you need to double, maybe even triple how much you are saving on a monthly basis as the more you save goes to offset a higher housing cost when you do finally pull the trigger, rather than lowering housing costs as most might think. Think of it being at opposite ends of the spectrum to achieve the same goal. By diligently saving a portion of your income towards a higher down payment in hopes of lowering a mortgage payment, factors are working against you at the same time like it or not, choppy interest rates rising home prices. If you don’t have the down payment at all or have access to cash, all you can do is continue to save. However, if you have the cash the numbers may work in your favor. Consider the following scenario.. let’s say you purchased a home in the calendar year of 2010 in Sonoma County, California with an FHA Loan at 3.5% down. Let’s say your home value/purchase price back then was $275,000 and you put down $9,625 at closing, the minimum FHA contribution needed.

Fast forward to July 2013, assuming you took out a 30 year fixed rate mortgage diligently paying down your principal and interest each month (since 2010) while the economy gained momentum, at this point you would have accumulated it least 20% equity just by getting your foot in the door. Your mortgage would have been paid down to approximately $255,000 and your home equity would’ve accumulated just by virtue of the of amortization balance pay down, providing refinance opportunity anyway.

Fast-forward to 2015 housing prices have continued to rise based on real demand vs supply (not an inflated market created by credit products pre-2007) and now you probably have 40% equity in your home if not more giving you a bigger chance to refinance your house anyway if you didn’t back in 2013 for example.

Can Buying A Home In 2015 Pencil?

As the economy continues to post positive economic stats, driving housing demand, the answer is yes. As prices continue to rise, homeowners benefit by the consistent monthly increase in lendable home equity. This equity is used to reduce your mortgage payment or switch to a shorter fixed rate term in an effort to pay off the mortgage faster when refinancing.

If you have it least three and half percent of the purchase price to buy a house or more conservative approach 5% of the purchase price to buy a house, there can probably be a good case to be made to be buying a home knowing that the probability of you continuing to accumulate equity is probable. Remember housing prices from 2004-2006 were brought on by a market rampant with abusive and predatory lending practices, virtually giving loans to anyone who applied. Getting a mortgage today and well into the future no doubt requires your ability to prove you can actually afford the mortgage payment. This leaves the direction of home prices to economic trends not, aggressive credit products. In other words, the rate of appreciation in homes is healthy in relationship to the broader economy with jobs being created and the unemployment rate remaining low. The Federal Reserve recognizes this which is why there’s a probability tightening (raising) interest rates for a growing economy- to slow down the rate of inflation later part of this perhaps in Q3.

If you were to buy house with today’s interest rate and housing environment what the numbers would look like with 5% down assuming house price for 425,000 Or 10% down by savings for more skin in the game later. If you decide to wait until you’re more comfortable with a 10% down payment, assuming housing prices continue their upward momentum and interest rates follow suit by trickling up, housing will cost more. A $425,000 house today could cost you $50,000 in purchase price for that exact same house and $426 per month more and mortgage payment even by forking over more cash by the time you save the extra cash!

Other Lending Risk Factors At Play

  • PMI is a lower factor on loans 417k or lower
  • If the loan amount exceeds 417k, 10% down is needed (for conventional still 3.5% for FHA)

Notice the change in private mortgage insurance (PMI) and the property taxes are also higher, again pointing to a higher future cost of housing, even with more skin in the game.

What we are advocating is this, if you can afford a mortgage payment with today’s home prices and interest rates and you have at least a 5% down payment (or 3.5% FHA), as well as monies for closing costs, it might better serve you to purchase a house while you can before the same priced house in the future costs you more because you’re simply electing to put more money in when it might not be necessary. Moreover, should that scenario play out you could always refinance your house in the future anyway to take advantage of the additional equity accumulation on a conservative fixed rate principal and interest mortgage.

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