Why Putting 20 Percent Down on Your First Home Is a Mistake

Why Putting 20 Percent Down on Your First Home Is a Mistake

If you wait until you have a 20% down payment to purchase your first home, you’re not being patient and responsible. You’re making a big financial mistake.

The median home price in the U.S. in the second half of 2021 was $374,900.

If you followed conventional advice and aimed to put down 20% as a down payment, you would need $75,000 saved in order to purchase a home before even considering closing costs. For a typical first-time homebuyer, that could take almost eight years!

Yikes.

With student loan payments and rising rents, not only would this savings goal take years, it’s simply not realistic. As in, nobody does this.

The median down payment is only 12%, and for first-time homebuyers, it’s 6%.

Thanks to mortgage loan options from Fannie Mae, Freddie Mac, the FHA, VA, or USDA (acronyms FTW!), it’s possible to put down as little 3%, or even 0% (literally nothing), on your first home.

Set a savings goal – and hit it, faster – with Gravy. Download the app to earn Gravy Rewards that will count towards the cost of your first home.

Here are five key reasons why you should buy your first home as soon as possible:


#1: Rent prices just keep rising.


The nationwide median rate for a one-bedroom apartment is $1,400 as of March 2022 – a 12.2% increase over last year, and the ninth time rent rates hit an all-time high in the last 10 months. It’s hard to save when your biggest bill each month just keeps getting bigger.

And rent can often be more than the cost of a monthly mortgage – and climbing.

Housing costs are inevitable, but at least with a mortgage you’re building equity with each payment made. In fact, the average mortgage loan borrower gained $55,300 in equity last year. Renters? Not so much.

Plus, every dollar you save today for a down payment is worth less next year at this time. The longer you wait, the more you can save, but the value of your dollar decreases.  Thanks, inflation.

Ready to buy? Not sure? Talk to a Gravy Home Advisor to find out, and we’ll connect you with a lender when the time is right (and we can help you find a great one too).


#2: Home prices just keep rising.


From the beginning of 2020 to the end of 2021, average list prices rose 27% on sites like Realtor.com.

The good news: owning a home is the best hedge against inflation. As the cost of living goes up, your housing costs don’t. A fixed rate mortgage means your monthly payments stay the same. This isn’t the case for a renter where landlords typically raise rents each year.

Trying to time the market? Here’s a perfect example of why waiting for home prices “to come down” before you buy is not a great plan. In just the last six years, the average sale price of a home in the U.S. has increased over $100,000. It just gets harder to buy the longer you wait.


Year / Average sale price of a home
2015: $350,450
2016: $359,650
2017: $381,150
2018: $382,475
2019: $379,875
2020: $389,800
2021: $452,525


Yes, there are market corrections, and home prices can go down. Looking at you ‘08! But in general, over the long-run, home values have consistently gone up.

Waiting for mortgage interest rates to drop? If you buy now and then rates drop, don’t forget that you can refinance at a lower rate down the road. If rates stay put, or even go up, you’ll be stuck paying more the longer you wait.

#3: Investing vs. homeownership: both are best.


Your home is one of your biggest investments: it’s true. But it shouldn’t be your only investment.

By diverting some of your down payment savings to the stock market, you could wind up with a significant nest egg 30 years from now.

Let’s say you’re buying a $400,000 home. You’ve saved $40,000 – 10%. What if instead of putting down your entire down payment savings, you only put down 3.5% ($14,000) and invest the rest?

Sure, you’ll have to pay private mortgage insurance (PMI) to the tune of about $300 per month, but only until you’ve gained 20% equity in your home.

On the other hand, after 30 years with $26,000 invested at an average rate of return of 8%, you’ll have a balance of almost $280,000. Plus an appreciated, paid-off house.

A quick tip: if mortgage interest rates are lower than your expected annual market return, you may be better off investing your cash in the S&P 500 instead of putting down a larger down payment.

Starting both your homeownership journey and your investing journey as soon as possible is the best way to set yourself up in the future.


#4: PMI isn’t as scary as you think.


PMI often gets a bad rap – who wants to pay an extra few hundred dollars a month if they don’t have to? But delaying your first home purchase for the sake of avoiding PMI is a short-sighted way of thinking about your money.

Private mortgage insurance usually costs about 0.5-2% of the loan balance each year, and it breaks down the biggest barrier for most people who want to buy a house: saving a giant down payment.

If you want to buy a $400,000 house, without PMI, you’re waiting until you can save $80,000. With PMI, you can put as little as $14,000 down with an FHA loan. Paying an extra $300/mo or so for PMI is typically easier than saving $80,000. And it doesn’t last forever.

Once you have 20% equity in your home, you can request PMI removal. All you have to do is reach out to your lender. Otherwise, lenders automatically cancel PMI when you get to 78% LTV (loan-to-value).

And with home prices quickly rising, many homeowners are building equity fast. You can ask your lender for a new appraisal of your home, or pay to have one completed, and use that to make the case for PMI removal.  

#5: It’s not easy to access home equity.


Once that money is used for a down payment, you can’t get it back – until you sell your home or take out a home equity line of credit (HELOC).

Home equity is not a liquid asset. Need cash for emergencies? Need money for home repairs? Make sure you have some savings beyond your 20% down payment if that’s the route you decide to go.


How much should you put down?


5% to 10% is a good target range for first-time homebuyers. That said, it all comes down to your personal finances, preferences, and goals.

Are you sick of renting and want to buy ASAP? A smaller down payment could help you buy sooner, but means higher monthly mortgage payments.

Do you look forward to being a homeowner down the road, but are happy renting for now? Start saving for a down payment today – the more you save up, the more options you’ll have when you are ready to buy. If you put more down, your monthly mortgage payments will be smaller.

What if you don’t have a high monthly income, but you do have a chunk of change in the bank? In that case, a higher down payment will save you money every month in your budget.

Heads up! It’s not all about the down payment. Two other factors that play a prominent role in what kind of mortgage you can get (and how much you’ll need to put down) are your credit and your debt-to-income ratio. Lenders are going to take a close look at both of those factors.

As a rule of thumb, you shouldn’t spend more than 30% of your monthly income on housing. Calculate your debt-to-income ratio and check out how much house you can afford.

Don’t regret waiting too long.


Homeownership may seem daunting, but it might be closer than you think. The only way to know if you’re ready to take that next step is to talk to an expert.

In the Gravy app, you can set a home buying timeline and connect with a Gravy Home Advisor. They’ll ask you some questions and connect you with the right lender based on where you’re trying to buy and when.

Stephen Freudenberg
Stephen Freudenberg
Head of Homeownership at Gravy
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