Comments on: Is Putting a 20% Down Payment on a House Realistic?

By: ab

ab — Wed, 19 Dec 2007 14:04:44 +0000

I work in the financial management area of a Fortune 500 home builder with a mortgage arm. I do not disagree with your basic premise that putting 20% down might not be realistic for all people. In fact I put 3% down on my first home using an FHA loan, but that was long before the current downturn in housing.

I think you are setting unrealistic expectations based on what people can actually get today.

So lets get real with today’s market. Unless you have been completely ignoring the news there are very few financial institutions today who would consider anything less than 20% down unless you have outstanding credit or can qualify for an FHA or other special government supported program. In the current market if you can’t save up a 20% down payment then you are most likely overextending yourself on the house price ranges your looking at.

Don’t mislead your readers.

By: disneysteve

disneysteve — Wed, 28 Nov 2007 03:12:33 +0000

Where you should be saving your downpayment money depends largely on your timeline. If you plan to buy in 5 years or less, you should probably avoid the stock market as you don’t have time to ride out a market downturn. With a short timeline, you should stick with high-yield money market accounts or CDs.

By: dave

dave — Mon, 26 Nov 2007 17:48:57 +0000

Yes, the price of the home increases, but assumedly we’re not saving our down payment in a mattress, right? What if we sock that $500 or $1000 a month into an index fund? By and large, that’s going to grow faster than housing prices increase, the already popped bubble notwithstanding.

I’ve been doing almost exactly that ($250 a week) for about 5 years, and i have an extremely nice downpayment saved up! I could buy a house now, but my apartment’s fine for now, and i think the housing market will decline a bit more.

By: Minimum Wage

Minimum Wage — Sun, 25 Nov 2007 20:23:06 +0000

Most people earn much more than minimum wage.
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Question for “free market” advocates:

Where’s the private sector when you need them? Why aren’t they building for this sectopr of the market?

Every other niche market seems to be served.

By: Licky Dog Breath

Licky Dog Breath — Sun, 25 Nov 2007 20:08:43 +0000

One other advantage to a 2nd loan is that the 2nd mortgage issuer these days ought to be very concerned with whether the home is fairly priced, and not fund a situation where there would be negative equity. That protects the buyer from overpaying. When I go shopping for a home, even though I have the funds for 20% down, I plan to plead poverty when negotiating the price. I will be home shopping in work clothes, arriving in a rusty, dented used car. As if (like many people) I don’t have that 20% - because getting those 2nd mortgages is becoming very difficult. That difficulty will be an excellent bargaining chip in negotiating a fair/realistic price.

By: To Brian

To Brian — Sun, 25 Nov 2007 01:41:50 +0000

To the above poster (Brian). You make a good point about including the earnings on your savings into the equation. However your assumptions are pretty optimistic. You’d be pretty lucky to be in a mutual fund that returns 12% a year for a decade, but nonetheless there are a number that have done that over the past decade. Your calculation is a little high though, I get it works out to around $98K after 9 years. Also you aren’t figuring in taxes. Assuming you never have to reallocate and you just pay taxes at the end you are going to pay somewhere around $15K in taxes, bringing you down to around $83K. Then factor in the rise in housing prices over that time and the $500/month doesn’t move you forward all that much if you’re looking to buy in any even moderately popular area of the country.

By: Brian

Brian — Sat, 24 Nov 2007 18:37:31 +0000

I don’t think your doomed to failure for not putting 20% down on a house. However, there are several things to consider when deciding how much to put down. Let’s look at how much PMI cost you. Let’s suppose your trying to decide between putting 5% down and 20% down. On a $100,000 PMI will run around $500 per year. To save that 500 dollars you need to put down and extra $15,000. Or put if we put it the other way it will cost an extra $500 per year to borrow that last $15,000. That means that extra $15,000 cost 3.33% per year. Not too bad, but now you have to pay interest on top of that. If you get a mortgage for 6.5% your actual cost for the $15,000 will be 9.83% per year. That’s not much better than putting your down payment on a credit card.
What about the posters talk about waiting 9 years to buy a house, meanwhile the housing prices are going up. One of the things that wasn’t figured into the equation was the return on the saving that you put away for all those years. If you invest $500 per month in a mutual fund that makes 12% returns, in nine years you will accumulate $113,000. That would allow you to put a nice down payment on a house. In some parts of the country you could pay cash for the house.
The main thing I would consider is the cost of owning versus renting. If your mortgage (plus taxes and insurance) are cheaper than the cost of renting, then your probably better off buying a little sooner.

By: JD

JD — Sat, 24 Nov 2007 16:11:16 +0000

Most people earn much more than minimum wage.

By: Minimum Wage

Minimum Wage — Sat, 24 Nov 2007 14:44:46 +0000

Yes, 20% down is very realistic if you are willing to drive older cars, work extra jobs, and lower your sights for your first home (all temporary). The way you eliminate the moving target problem is to start smaller (perhaps a condo) and move up.
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Don’t think there’s anything affordable on a minimum wage income, and 20% is certainly unrealistic. Starter homes in my area cost 10x a minimum wage income.

By: JD

JD — Sat, 24 Nov 2007 04:35:00 +0000

You make some pretty crazy assumptions. For instance you say:

“Chances are, if you are saving a huge chunk of money each month for a large house down payment, you arenâ€™t contributing the max to your retirement account.”

Huh??? You know a lot of us young people make very good incomes. I contribute the max to my 401k out of my first several paychecks each year. In our plan we’re allowed to put up to 86% of our paycheck into our 401k and that’s what I do, after it maxes out to $15.5K or whatever the contributions stop. While that 86% is being deducted I have more than enough money in savings to take care of my expenses. I have saved over $100K for a downpayment outside of my 401k and my 12-month “emergency” fund. Plus more money in stocks as well. This is not just me, most of my friends have a similar financial profile.

We live in a high cost area (NYC). The typical 1-bedroom in a decent area will cost you over $800K and most of them are co-ops which require more than 20% down (often 40%). This is a big reason housing prices in Manhattan haven’t gone down even in the current market. Most housing is co-op and the co-op boards only allow people who can easily afford the home. There was a small condo boom in Manhattan over the last several years and those have been effected a little bit, prices down a couple percent but nothing major. The condos do allow you to put 20% or less even. However myself and most people I know don’t like the condo buildings and prefer the co-ops.

You say things like saving $1000 a month is hard for people when they’re funding a retirement account, etc. But you make no assumption about peoples’ earnings. Here in Manhattan it’s extremely common for 20-somethings to earn 6-figures. Me and most of my friends do and we’re not investment bankers or lawyers. I work in tech for instance. Saving $1000 a month is nothing. It’s extremely easy for me to do but it won’t get me anywhere.

As far as houses in the $200k-$300k range go you won’t find them anywhere in or near NYC. You’d probably have to travel 100 miles away from the city to find things that cheap. But then again in those areas you probably wouldn’t find too many 23 year olds making 6-figures.