Why experts think saving up to 20% for a down payment at home could backfire


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  • Saving 20% ​​for a down payment is a dream for many; that means you will avoid private mortgage insurance.
  • But with rising home values ​​and low-interest savings accounts, saving 20% ​​might not make sense.
  • Instead, go into the market now with a smaller down payment and let your home’s value appreciate.
  • Read more stories from Personal Finance Insider.

If you are working hard to save up to 20% down payment for your dream home, there are many economic factors preventing you from doing so. You may not be saving fast enough to progress, according to a recent report from the National Association of Real Estate Agents. In fact, their statistics show that the median selling price of existing single-family homes increased 22.9% to $ 357,900 over a one-year period from August 2020 to August 2021.

Financial advisor Scott Eichler of Standing Oak Advisors, who is also the author of the bestselling book Don’t Play Chicken With Your Nest Egg, offers the following example of how trying to save up to 20% can backfire:

Imagine you and your neighbor wanted to buy an average house in Southern California for around $ 750,000, he says. Your neighbor decides to save $ 150,000 to be able to save 20% and avoid private mortgage insurance (PMI). Since she has a high income, she can save 15% of her salary of $ 250,000 for a house, or $ 37,500 each year.

Unfortunately, that money languishes in the bank and earns 0.1% in a savings account during the four years she saves. In the meantime, the house has appreciated a modest 3% per year, which means your neighbor now needs $ 844,000 for a similar property.

In the meantime, you decide to go ahead and buy a home in your desired price range with just 5% down. Although you paid the PMI on the mortgage in your neighbor’s four years of savings, you have considerable equity as your home appreciated 3% during that time and is now worth $ 844. $ 000. Not only that, but you’ve paid off your mortgage enough over four years to get a reassessment and have your PMI withdrawn from your loan.

This example is pretty basic, but it shows how trying to save a large down payment can backfire, even in a market where house prices are rising 3% per year. We all know that today’s markets are raging and house prices are rising much faster than that.

With that in mind, you might be wondering if the dream of saving up to 20% is worth it. This threshold will save you from paying for private mortgage insurance when you take out a mortgage, but at what cost?

We interviewed experts to find out what they think of saving up to 20% for a home in today’s housing market, and if it’s worth it. While all of our experts agree that your next steps really depend on your unique situation, they have a few tips that anyone can apply.

Don’t be afraid to put less than 20%

Patrick L. Ryan, who is CEO of First bank, says it’s important to know that you don’t have to make a 20% down payment to get a mortgage. You can want to do it, but that’s another story. The reality is, you may be able to walk into a home with a down payment of 3.5% to 6% or 7%, says Ryan.

Depending on the lender, a conventional mortgage typically starts at a 3% to 5% down payment, or up to $ 12,500 on a $ 250,000 home.

While PMI is required with this type of down payment, the lender will usually write off that extra expense on your mortgage once you have around 22% equity. In a housing market where prices are rising rapidly, you might even be able to get an appraisal to prove that you have 20% equity at some point and then the PMI has fallen that way.

Lower your expectations

Financial Advisor Josh Strange of NOVA Good Life Financial Advisors says he thinks consumers need to accept the fact that homes are going to be more expensive over time, not less. As with rents, there really is no way around the level of housing inflation that is happening right now.

With that in mind, he suggests being prepared to make some changes in your financial life so that you can afford the home you want. For example, you may need to cut your budget or drive an older car to make more room for the type of housing payment you are likely to have.

“Plus, buying a smaller or cheaper home can be a great decision,” he says. “Getting to the perfect house is often a game of chess and can take a few moves to get to where you want to be.”

Consider loan alternatives

While you are making peace by putting less than 20% on your home purchase, you can also consider traditional mortgage alternatives that can help you get into a home much sooner.

Michele Hammond, home loan advisor for Chase Private Client, says Federal Housing Administration (FHA) loans only require a 3.5% down payment and can be a good choice for borrowers short. ‘money. In addition to low down payment requirements, FHA home loans also come with low closing costs and leaner credit requirements, so they can work for a wider range of consumers.

Eligible veterans and active-duty military personnel can also look for VA home loans, which may not require a down payment.

“Again, a 20% down payment is not required to purchase a home,” says Hammond. She also notes that some of her clients who can afford do not put in a 20% deposit due to other financial goals they have.

For example, some buyers choose to deposit as little as possible so they don’t have to liquidate their investments, she says.

They will have to pay the PMI in this case, but they can gain a head start in other areas, such as avoiding immediate taxes on investment gains.

Buy only if you are absolutely sure

Jeff Rose, who is the financial advisor behind Financial Good Cents, says today’s real estate market is so dynamic that potential buyers should approach the home buying process with a clear head.

“The last thing you want is buyer’s remorse after buying a house 30% more than it was worth just a year ago,” he says.

While you might want to buy, it doesn’t matter if you need a place to live and plan to stay put, Rose says you should take stock of your overall situation before buying at the store. top of the housing market – or at least the top right now.

“Unless you are 100% sure that your work is intact and that you are going to be living in this house for the next 10 years or more, this is the only way to buy what makes sense,” he says. he.

In some cases, it might even make more sense to continue to rent than to buy at today’s price, Rose says. This is especially true if you’re not really sure what you want your career to look like in five or ten years.

According to Rose, “Having flexibility and not being tied to a mortgage makes big decisions like a career change much easier. “

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About Matthew R. Dailey

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