Should You Save Up More For A Down Payment Before Buying A Home?

Should You Save Up More For A Down Payment Before Buying A Home?

This week, I wanted to talk about the idea of waiting to buy a home, to save up more of a down payment.  Should You Save Up More For A Down Payment Before Buying A Home?  Sometimes, we talk to potential home buyers that decide they just want to hold off and continue to rent so that they can save more so they can have a larger down payment and a smaller monthly mortgage payment.

That sounds like a great idea on the surface, but I want to dispel that myth. Unless you have something coming up that you’re going to get quite a bit of money from like an inheritance or something like that, saving month to month for more of a down payment can actually backfire on you. Let’s do the math.

Let’s talk about a $400,000 home in the Denver area, which is a modest home in today’s market. Prices have been going up and up and up. And nationwide appreciation has been anywhere between 4% or even higher in some areas. Definitely in Denver, it’s been higher, but let’s just use a 4% appreciation rate. Let’s say that same $400,000 home that you’re looking at right now, but you decided to wait to save up more of a down payment, let’s see what happens in the course of a year if there’s 4% appreciation.

400,000 times 4% is 16,000. That same home in one year is going to be worth or is going to sell for 416,000, not 400,000. That means that you would have to save up 16,000 more dollars over the course of a year just to have the same exact mortgage balance and mortgage payments.

That’s something to think about. You’d have to actually save more than 16,000 to get ahead on having a smaller mortgage and a smaller mortgage payment. That’s not even to consider the fact that interest rates are at historic lows right now. If rates go up even a little bit, that’s going to affect your payments. So, definitely something to consider.  If rates go up even 1/2%, it would increase your mortgage payment by $102/month on a $380,000 mortgage balance, assuming you put 5% down on a $400,000 home.

The other thing to remember is that when you buy a home as opposed to renting, a portion of your payment goes towards the equity in your home. It goes towards paying down your mortgage balance.

Because of that fact, you’re building equity every month by not only that house going up in value, but by paying down your mortgage. Instead of paying the landlord’s mortgage down, you’re actually going to improve your financial position each and every month when you make that payment.

Just some food for thought and that same $416,000 home, let’s just take an example two years from now 432,000. in two years, you would have paid down your $380,000 loan balance (the 5% down on a $400,000 home example) to $363,000.  That means if your home appreciates by 4% per year, you would have $69,000 in equity in your home with a $20,000 down payment initial investment.  So this is all equity and wealth creation that you will lose out on by not buying right now.  This is the cost of waiting to buy a home.  And like we discussed before, you may actually end up with a worse monthly payment down the road if you decide to wait. Give me a call at 303-670-0137 or email baxterteam@fairwaymc.com if you want to run the numbers on your particular situation, or if you have any other mortgage-related questions. That’s why I’m here.  Once again, my name is RJ Baxter. You guys have a great rest of your day. Thanks for watching.