The idea that you need a down payment of 20% is nonsense and could actually end up costing you more money. Oh, that got your attention, didn’t it?
The world of real estate is a fascinating place. It’s absolutely full of experts. If you’ve ever bought or sold a house in your lifetime, you may fancy yourself to be a bit of an expert on mortgages and buying a house in general.
But, a lot of that home-buying advice is coming from people who bought a home 10, 15 or even 20 years ago. And today’s real estate market bears little resemblance to what it looked like at the turn of the century. Hell, it looks completely different than it did 5 years ago.
For example, about 50% of homebuyers saved for a down payment of 20% back in 2000. Now, however, that number is down to closer to 40% of homebuyers.
Why is that? Is it because saving that much money is god damn impossible these days? That’s part of it.
The other reason is, you might actually spend less money on your home with a slightly smaller down payment.
The 20% Magic Number
A lot of first-time buyers will sit on the sidelines to save 20% without even really knowing where that number came from.
The 20% down payment has been espoused by people who will tell you that a smaller down payment would mean you’re paying for mortgage insurance (often rolled into your mortgage payment) and that is simply “throwing money away.”
However, we recently came across a great article that rethinks these numbers.
For example, let’s say:
• You’re buying a $450,000 house
• You have your 20% saved
• You have a conventional mortgage amortized over 25 years
• You get a five-year fixed-rate mortgage at 3.29%
• Your monthly payment would be $1,758
Or, let’s say:
• You’re buying the same $450,000 house
• You have 19% saved
• You’re looking at mortgage insurance of $10,206
• Your monthly payment could work out to $1,743
The New Math
You just saved about $15.00 a month with a smaller down payment. This isn’t a massive savings, but it represents a massive shift in thinking. It flies in the face of everything we’ve been led to believe about down payments over the years.
In the example above, the higher-ratio mortgagewould have a qualifying rate of 4.89% and the conventional mortgage would be at 5.29%, which is the client’s actual rate plus two percentage points. The lender is happier when you have an insured mortgage!
Another Reason to Stop Listening to “The Experts”
Obviously $15.00 a month is not a big deal. What is a big deal is the extra months or years that a first-time buyer can spend sitting on the sidelines waiting to buy a home, with this magic 20% down payment number branded into their minds.
They’ve been told they need to save that 20% or they’re wasting their money. Meanwhile, they wait another year to buy a home, and the market shifts over those 12 months. Trust me when I say a year can make a big difference.
Waiting a year could mean adding thousands of dollars onto the price of homes you’re looking at, or moving a lot of homes just out of your price range. You could easily end up having to pay more money for a slightly lesser home.
Are you a homebuyer who is getting a lot of well-meaning-but-outdated housing advice from family, friends, and coworkers? Have you been sitting on the sidelines scrolling through house listings but never feeling like you’re allowed to go see anything yet? You now have permission to get out there!