Why 20 Percent Down May Not Be Your Wisest Move

You know how the conversation goes…

 

PERSON:

“Thinking of thinking about buying a house.”

OTHER PERSON:

“Oh yeah, start saving for that down payment!”

Or…

FRIEND:

“We’d like to buy a house.”

OTHER FRIEND:

“Are you looking?”

FRIEND:

“No, I need to save up for the down payment first.”

And in every case, what is that down payment number everyone has on their mind? You guessed it. Twenty percent.

Most people still think that to get a loan or a good rate you have to have twenty percent down. So they don’t look. Or they wait. And waiting can mean missing out on current opportunities that might just be better than the ones available after you finally saved up for that twenty percent down payment.

The Origin of the Myth

Up until the mid 50s, down payments were indeed, as a rule, twenty percent. But banks eventually realized that rising home prices made it ever more difficult for people to put such a high percentage down. And number of other innovations like PMI and second mortgages began to make lower down payments possible.

The Reality

As the market has become healthier, lower down payments are very possible again. If you happen to have twenty percent in your pocket, it might be a good idea to put it toward your down payment, but not necessarily. The reality is that fixating on twenty percent can be a decision you regret.

  • It can take a long time to save twenty percent, and, in the meantime, you’ve thrown a lot of money at rent which could have gone toward mortgage payments started you building equity.
  • While you wait to save, the market can change—it changes all the time—and you might find yourself stuck with higher rates.
  • There are tax advantages you can cash in on when you own a home.
  • Market changes can price you out of the house you want. For example—I had a client in 2014 that was determined to wait to get a better rate by saving up to put twenty percent down.
  • Unfortunately, when they did save, the $400,000 house they wanted had become a $465,000 house they couldn’t afford.
  • Starting in on building equity puts you in a position to take advantage of future rate dips. For example, another client of mine did go ahead and buy a home with less down. Sure, they’re initial mortgage had a little bit higher rate. Yet, because they bought and built up some equity, when the market dipped and a refinance opportunity presented itself, we were able to restructure their mortgage to get that lower payment.
  • Even if you have the twenty percent saved, there are plenty of reasons you might want to keep that cushion in your bank account rather than pour it into your mortgage. You might have some big life events coming up like sending kids to college or starting a business. Or it might be nice to have access to that savings if another financial downturn did strike—the real risk of economic crisis is that people find themselves between jobs for a while, in which case a little extra cash in the bank does you more good than a little more equity in your home.

The Bottom Line

A mortgage unlocks so many benefits for you as a homeowner, from tax deductions to building equity for the rest of your life. You might not need to save up anything. You might be able to start now.

So, talk to someone who can show you how to use a mortgage to create leverage toward building financial independence.

If you’d like to speak with us, we’re here in the Washington DC Bethesda area, and always ready to help.