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When buying a home, 20 percent is the magic number recommended for a down payment. Unfortunately, at least for first-time home buyers, 20 percent can be incredibly hard to come by. And waiting to save up that 20 percent may not be the best financial move for many buyers.
In a 2014 survey by Zillow, more than two-thirds of renters indicated that their biggest barrier to homeownership was saving for the downpayment. With median home prices in Utah creeping upwards of $245,000, would-be homebuyers would need $49,000 to put 20 percent down.
Or...they could opt for a lower downpayment — anywhere from 0% on up — with only minor adjustments. Here's what you could expect.
Higher interest rates — but only slightly
The less you put down on a home, the higher your interest rate may be...but how much higher? In actuality, the rate may only vary by 0.25 or 0.5% on a 30-year mortgage. For the average home in Utah, the increase could be less than $100 per month. Considering that interest rates on a cheap one-bedroom apartment are jumping up more than $100/month every time a lease expires, buying could save you money.
Slightly increased closing costs
Mortgage origination fees are often calculated as a percent of the loan, so the higher the loan, the higher the origination fee. This one-time fee might cost you $500 extra on the average Utah home, but when rolled into a 30-year mortgage — a.k.a., 360 payments — its a little over a buck a month.
Private mortgage insurance payments for the first five years
Until the LTV (loan-to-value ratio) of the home is at 80%, homebuyers are often required to pay private mortgage insurance (PMI). That could mean an extra $150-200 per month on the average home. But even with a zero down conventional 30-year loan, that $250,000 home would reach80% LTV. And those PMI payments would go away.
$1250/mo saved on rent
With over three million official Utah residents now, average monthly rental prices in the Salt Lake City area are soaring. In fact, theyre expected to hit $1520 this summer and continue climbing. This same monthly payment of $1520 could easily be your mortgage payment on a $250,000 home. And, buying sooner rather than later means those rental payments convert into home equity instead.
More cash on hand
Saving $1,000 per month for the down payment while also paying $1520 per month in rent means the wannabe home buyer is putting $2520 per month away for current and future living expenses. How does that compare to purchasing a home today?
Thats an extra $903 per month cash...in hand or in the bank.
Assume you put $1,000 per month into savings. Youd have to save for four years to accumulate 20% down for that $250,000 home. However, according to last years Home Price Expectations Survey, the Utah average home is expected to increase in value 10-30 percent in the next five years. So, youd need to save up $63,750 in order to put 20% down on that same home in 2021...and wait another 15 months to buy it.
Greater equity in five years
True, walking into closing with 20 percent down means you immediately have equity in your home. But buying now, even with a low down payment will do more for you — because youd likely pay down your principal during those years to the point where youd owe less than 80% of the original loan value AND the home value would have increased. So your equity would be 28-39%. Youd own more of your home.
And if all that didnt convince you to buy now, consider this not-so-fun fact: Forbes experts predict that home affordability will worsen in the near future, particularly for low- and moderate-priced homes. Which means homebuyers, particularly first-timers, may have a tougher time finding something in their price range if they spend too much time saving for the down payment.
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