Real Estate
June 24, 2017
link to facebook link to twitter

Going backwards trying to save for a home?

By: Scott Sheldon
April 14, 2017

Do you need help saving to buy a house? What you think you need and what you actually need may not be the same. Here is what you should know when saving for a home.

In order to purchase a home, you need at least 3.5% for a down payment. Another option is Down Payment Assistance (DAP). DAP allows you to pay little to no money down. However, we’re going to talk about wanting to save even more for a larger down payment.

Saving for a down payment is a smart financial move. For example: If you plan to purchase a home in two years, save 10% of your gross monthly income. If you plan to purchase a home in one year, take a more aggressive approach and save 20%. Both of these figures give you a realistic depiction of owning a home, instead of dreaming about it.

You do not need a large down payment to purchase a home. The common response “I am waiting to buy a house until I have a big down payment” is driven by the misconception, that a larger down payment will make your mortgage payment smaller.

Here’s what’s wrong with that type of logic. It is true that 20% down, for example, versus 3.5% down is going to dramatically change your payment. There is a big difference between saving up for 20% down if you’re in the 3.5% down range ‘as is’ if payment is what is driving the need to save.

Let’s say housing prices in your area are $475,000 and you have 3.5% down. Let’s say you have the money for closing costs. If housing prices in your area are rising due to low inventory and large demand, prices could be rising faster than you are able to save. This means you are actually going backwards by savings. Another thought to consider is: by getting your foot in door, you’re getting a couple benefits you do get while renting.

Forced savings – you’re not getting the benefit of a forced savings account, as part of your payment goes to principal and part of your payment goes to interest.

Appreciation – you’re not getting any market forces working in your benefit, on the property that’s appreciating. The rent you pay goes to your landlord.

Tax Deductible – property taxes and mortgage interest are 100% tax-deductible. This is another benefit you forgo each month while you continue to rent.

Saving for a down payment is important, but saving extra money to try and lower your mortgage payment can be a losing proposition, especially if the market forces are stronger than your savings rate. If you were to purchase a house, could you afford the mortgage payment? If you are backed by market forces, you could leverage the market. Perhaps in two years’ time, probably then you will be able to refinance to drop the mortgage insurance. This would subsequently reduce the mortgage payment that you had been trying to save a larger down payment for.

The take away here is not to buy a house, just because you have the down payment, but to be strategic about it. Consider all of your options thoroughly, so you can make the most informed decision about your financial future and what home ownership might mean for you.

Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.