The housing markets in the United States are on fire; the rapid rise in value can result in the death of a 20% down payment. Especially for first-time homebuyers, the task of making a 20% down payment on your mortgage can be nearly impossible, especially when you keep saving for other financial goals like retirement. Pending larger down payment could mean you are missing out on your ideal home or what appears to be an ever-increasing home price as the basis for a 20% down payment. Is the 20% prepayment dead? Should you still try and postpone 20%?
Most home buyers save less than 20%
Good friends just won the bid for their first home, paying about 33% more than they asked for. A decrease of only 5% allowed them to continue bidding for this house (in the hot real estate market). If you have income, you are more likely to be eligible for a mortgage with an initial payment of less than 20%. Smaller down payments will mean a larger mortgage payment and likely a higher interest rate.
Without the help of home equity from the previous home, first time homebuyers often have trouble come up with a solid down payment. As a financial planner, I don’t mind if you don’t have a large down payment if you have strong financial habits and can save on your down payment. You don’t want to be poor at home; if you don’t have accumulated dollars for the down payment (and possibly credit card debt), you are playing with fire buying a house. Let me tell you, as a longtime homeowner, something is constantly breaking down or in need of repair.
Waiting for a 20% decline could mean a loss
Although I have clients all over the country, my financial planning firm – DRM Wealth Management – is based in Los Angeles and Palm Springs, which means a 20% decline is a big number. Even for entry-level single-family home in Los Angeles, we often talk about an initial payment of 200-400 thousand dollars. This is a lot of money. With all-time low interest rates and meager homes for sale, I wouldn’t want people who managed to save good sums on new homes to be overlooked because they didn’t have a 20% down payment.
The downside is that you are in a cheaper housing market. If you can’t shell out 20% on a $ 100,000 home, you should take a closer look at your finances before moving on to home ownership. Regardless of the value of your home, you will most likely need cash reserves to qualify for a mortgage. Likewise, you do not want to invest 100% of your savings in a down payment, as you will most likely incur shipping costs. Most people also have some overlap with renting and moving into their new homes. Don’t forget about other home buying expenses like inspections, appraisals, etc.
Typical House Payments
Before making an offer for a home, talk to your lender to find out what amount of mortgage you can qualify for. Also talk to your trusted financial planner to find out how much home you can actually afford. If you are an employee, you can probably qualify for a mortgage that is much larger than the estimated amount. For business owners or self-employed, getting a large mortgage loan can be a little tricky. Your lender may have specific down payment requirements in order to get the best interest rate on your term mortgage. Recently, a lender demanded a 30% down payment on a large loan for a gorgeous Palm Springs home my client bought.
For conventional loans, you can get a down payment of 3% as a qualified buyer. Many home buyers still try to save 20% whenever possible. This can help you avoid higher interest rates and private mortgage insurance (PMI).
Federal Housing Authority (FHA) loans are often a good solution for first-time buyers with relatively modest incomes. These home loans require a minimum amount of 3.5%, with the majority of home buyers using these loans not saving much more.
Retired home buyers
For homebuyers approaching retirement age, it may be tempting to make a gigantic down payment or pay cash for your new home. I would caution against this for several reasons. First, once you retire, getting a new mortgage will be much more difficult. Second, you can always throw money into a mortgage later, but getting money back from home equity is expensive and time-consuming. Third, while a smaller down payment will mean a larger mortgage payment, investing cash (rather than using it as a down payment) will give you the most financial flexibility in the future. I would also like to warn again against getting a 15-year mortgage loan before retirement, as higher mortgage payments can shrink your budget or even force you to pay more taxes as you take more funds from your retirement account to make payments ( pushing more income into higher tax categories).
A down payment of 20% is good
The reality is that you can buy a house without a 20% down payment. If you’re just in a rush to buy a home without being able to postpone the down payment, you’re asking for trouble. (Remember how fun the financial crisis was for those who bought homes without making a down payment?) For those with strong financial habits, stable income, and sufficient savings, the decision not to invest 20% (or more) can sometimes be wise choice.