Is It a Good Idea To Wait and Save Up for a Larger Down Payment?
Most people know that most owner-occupied homes can be bought with just 3% down, but often I hear from people who want to delay purchasing so that they can save up and put down a bigger down payment to reduce their monthly mortgage payment or avoid paying mortgage insurance. Many times this is a good and responsible idea, but it’s important to do the calculations to see if that’s a good idea for you and your market, because as I’m about to show you in certain situations it could actually cost you money.
Let’s say the size and location of the type of house you’re looking for is around $350,000 (near the Austin median). You have the minimum 3% ($10,500) required to buy now, but you think in a year you can save 10% ($35,000) so that your monthly payment will be lower.
So far so good.
So a year later you have your $35,000 saved and you start looking at the same type of houses, only in the last year those houses have appreciated 8% (a very normal if not conservative rate of appreciation for Austin). So now they aren’t worth $350,000, they’re worth $378,000.
In this scenario waiting a year cost you $28,000 in the purchase price.
You might say, “Yes, but I still have a larger down payment so won’t my monthly payment be lower.” The answer is, in this scenario, NO!
Using a mortgage calculator, we can see that putting 3% down, on a $350k property, assuming 4% interest, your monthly payment comes out to $1,621.00
Now if you put down $35,000 on a $378k property, using the same 4% interest, your monthly payment comes out to $1,638.00
So in this scenario, you waited a year to own a home and it cost you $28,000 in the purchase price plus $17 a month for the life of your loan!
If waiting to save for a bigger downpayment makes sense for you depends on many factors including the appreciation rate in your area, and how fast you can save money. To find out what makes sense in your situation, contact me at shane@centralmetro.com.
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