When you put down a small down payment or choose to finance a 30-year mortgage, you’ll spend years making mortgage payments before you gain significant equity in your home.
Here’s why you should consider saving a 20% down payment, even if it’s tough.
A low down payment means years before you get significant equity in your home
My husband bought his first home in 2009 in upstate New York before we met. When we got married in 2011 in our twenties, we both thought he had done a great job becoming landlords so early.
Until the time to sell the house when it turned out to be a financial burden. He hadn’t thought he could move on after just a few years, as twenty-somethings often do at the start of their careers.
Because he bought the house with the minimal down payment, he paid extra in the form of private mortgage insurance, and he barely built up any equity in the few years he had it. possessed.
Worse still, his seemingly large investment lost value during the Great Recession, and to sell the house we had to pay $10,000 at closing. As experts warn of a coming recession, it’s important to consider how long you plan to live in a home, and how much interest and PMI you’ll pay versus building up considerable capital.
It’s also not safe to assume that real estate is always appreciating. Like us, you may need cash to come out of your pocket if you have to sell your home or if your home’s value goes down.
Without a 20% down payment, you’re probably buying more homes than you can afford.
Bankrate’s recent survey of financial security found that 74% of Americans rate home ownership as the highest measure of economic stability, higher than a comfortable retirement, a successful career, having children and owning a University diploma.
My husband and I watched our immigrant parents work well into our 60s. For our families, the cost of pride in ownership was that our parents couldn’t afford to retire, largely because they still had long-term mortgages that they had signed years ago. over 20 years.
They also fell into the trap of thinking they were saving money by writing off their mortgage interest on their taxes, when in reality they had paid tens of thousands of dollars in extra interest over the life of their loans. .
When it came time for me to start house hunting, I wanted to prove to our families that we had made it and could buy a house like they did. Our parents kept bragging about how their friends’ kids had bought big houses and how successful they must have been.
However, when we looked at a comparable sized house to the one my in-laws bought, it was twice the price of what they had paid years ago, and on a 30 year mortgage that would mean probably I should be working in my 60s too.
My husband and I didn’t want to repeat the same fate, but it was really hard not to succumb to peer pressure to buy a bigger house than we could afford. We were prequalified for a house of at least $200,000 and up to $400,000, but we didn’t have $40,000 in cash for a 20% down payment.
Paying a 20% down payment means you have a real stake in your home and your financial future
Because we intended to put a 20% down payment on our home, we ended up buying a tiny 2 bedroom townhouse for $101.00. It was so we could pay the $20,000 down payment and we could finance it on a 10 year mortgage instead of a 30 year mortgage.
This more conservative purchase allowed us to focus on saving for other goals, like paying for college and putting more money aside for retirement.
A 20% down payment on our first home allowed us to pay it off in six years, thanks to the shorter 10-year mortgage that devotes more of our monthly payments to principal rather than interest.
Shorter mortgage terms come with higher monthly payments. But even those higher payments were within our means due to the higher down payment, and our interest rate was lower due to the shorter term.
Saving up to 20% is absolutely difficult, but it can dramatically improve your financial habits
Before the pandemic, 37% of homes in the United States were paid off, but for Millennials and Gen Z, it’s not just the high cost of housing that makes buying a home difficult. Higher student loan rates, tighter credit standards since the Great Recession, the cost of daycare, and job market volatility certainly don’t make it easy to save 20%.
But the goal of saving a big down payment helped cultivate consistent budgeting skills and careful spending habits. This first $20,000 required us to:
- Reduce our dependence on credit cards;
- Get used to putting money into your savings and not touching it;
- Budget each month and have honest conversations about spending; And
- Find new ways to increase our income with side hustles.
Most importantly, it has helped my husband and I learn to work as a team toward a common financial goal. We’ve since sold that first home and bought and sold two more homes, each starting with a 20% down payment. We paid off all three before selling them, which went a long way to making us debt-free millionaires in our thirties.
Yes, saving a 20% down payment, combined with a shorter mortgage, means more money up front and a higher monthly payment than a 30 year mortgage with a minimum down payment. It probably also means buying a house that isn’t your absolute dream home.
There are many hurdles to overcome if you want to buy a home with a large down payment. So if you choose to buy a home without, there’s no shame in that.
But rather than defaulting to the lowest payment with a low down payment and a long mortgage term, try different home prices and down payments on a mortgage calculator to see how much you can really save in the long run. term.
#Buy #home #payment #build #wealth #faster
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