Hi, it’s John from Downs Capital. Today we’re going to talk about a very important topic. How much should you save for a down payment on a house?
It’s a great question and I think the best way to answer this is just by telling a story. You know, I was at a first-time homebuyer housewarming party not long ago, and as I was walking around the room listening to the friends I heard a bunch of whispers from a lot of people, things like how in the world did he do this? Where did he come up with that big down payment? Others even say, his parents must have helped him. But then my client who bought that house kind of heard all those same whispers. He finally spoke up and he said, people, look, I didn’t put this massive down payment to buy this house. You know, I bought it with like 30 grand. And everyone in the room was pretty shocked. You know, the reason people were so surprised is because I think everyone hears this idea that you need to put 20 percent down to purchase. They think that’s the only thing that they can do, even if it means waiting on buying a house.
I like to ask people, what if that wasn’t the case? What if you could do something right now? As the market gets healthier, lower down payment options become possible. Not only possible but very, very attractive. You know, I’ve had some clients in the past where they all sat back and said, you know, rates are at a historic low, but I don’t like this PMI. And they were kind of right, because PMI costs at that point were a little more expensive than they were today. So they decided to wait a year, save up more money and put that 20 percent down payment.
If you fast-forward to 2013 just one year later, property prices were up over 15 percent, and mortgage rates had shot up over one and a quarter percent. So those very same people that were very willing and able to purchase the house that they really wanted in 2012 were totally priced out of the market just one year later, because you just can’t control housing prices and you can’t control the mortgage rates.
I’ve had other clients that actually took that leap of faith and said, so we get it. We’re going to put a little bit less down right now, the payment’s going to be a little bit more expensive, but we’re saving money and we know we can always restructure that loan and maybe refinance in the future. And sure enough, here we are in 2016 refinancing homes that people bought in 2012, ’13, ’14, as we touch on that historic low rate section again. And they’re looking back saying, thank goodness we made that move when we did because through that refinance not only did they recognize how much more equity they’ve built and how much wealth they’ve established, but their mortgage payment dropped substantially because of interest rates and because of the removal of that mortgage insurance.
So the moral of this story is buying sooner is better. You know, a mortgage unlocks so many benefits for you as a homeowner, from tax deductions to building equity for the rest of your life. So talk to someone who can show you how to use mortgage to create leverage toward building financial independence. You might not need to save up anything. You might be able to do it right now.
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