First-time Home Buyer Series | #4 | Saving For A Downpayment

    Tired of renting? The Sales Executives at The Trembley Group Real Estate get it. The pressure to buy a home right now is real, especially as rent prices continue to rise.

    Using Census data from 1960 to 2014, inflation-adjusted rents have risen 64% during those years while incomes only increased 18%. As rent payments go higher, it’s even harder to save money for a future home.

    The housing market has rebounded sharply from its lows a few years ago. And with the job market improving and interest rates still relatively low by historical standards, many Americans are thinking seriously about buying a home right now. But the easy-money days of mortgage lending are long gone and many banks are requiring bigger down payments.

    For most renters, money is the top reason they haven’t bought a home. In fact, Builder Online estimates that it will take most young Americans more than seven years to save a 10% down payment. It’s no wonder so many first-time home buyers go with “creative financing” options that allow a small down payment but cripple their ability to build wealth!

    For those folks even thinking about buying their first home, even if they don’t plan to buy a house for a couple of years, they’ve probably started thinking about how to save for a down payment. Unlike saving for retirement where the funds are stashed away likely won’t be accessed for many more years, a down payment on a home is a large sum of cash that will be needed relatively soon.

    The median home price in America right now is $212,400, just a bit higher than the median home price in the Myrtle Beach market. At just 5% down, almost an $11,000 down payment plus closing costs will be required at closing for the typical home. Depending on the lender, the borrower’s credit and the local real estate market, a home buyer could need much more than that.

    Remember that “median” means “midpoint.” That means that 50% of the available housing will require down payments less than that. In any case, home buyers, particularly first time buyers, need to be realistic and patient. For most people, it will take five to seven years to save that kind of money, largely dependant on how much they are willing to prioritize.

    And remember that a conventional mortgage generally requires the buyer to have a down payment of at least 5 percent of the purchase price. An FHA loan requires a minimum of 3.5 percent. However, a down payment of less than 20 percent of the full purchase price on either loan, will require mortgage insurance, called PMI on conventional loans and MIP on FHA loans. PMI and MIP generally add between .5 and 1 percent of the loan amount onto a mortgage monthly house payment annually until the loan is 80 percent or less of the value of your house.

    To get the lowest possible interest rate and avoid mortgage insurance, it is best to have a down payment of 20 percent. That’s a lot of cash considering the price of houses.

    Buying a home is an exciting life milestone, but it can also be pretty intimidating. A home is probably the most expensive purchase most Americans ever make, so it only makes sense to establish a responsible plan for ownership. In today’s Myrtle Beach real estate marketplace, buying a home means building up some serious savings. Saving the necessary tens of thousands of dollars for the purchase isn’t that daunting if it’s taken one dollar at a time. Here are a few suggestions to get started saving for a down payment.

    Create a Monthly Budget

    It’s pretty simple. Building savings means spending less than you earn. And any financial goal begins and ends with a monthly family budget. It’s important to be both honest and realistic about spending habits and then stick with the plan as much as possible.

    Electronic bill pay is a great tool because payments take care of themselves. Another option is to print out a list of monthly expenses and check them off as they’re paid each month. That makes sure they’re paid, but also gives the satisfaction of knowing that the budget is on track and progress is being made.

    Quarantine Savings

    Many people have trouble saving money because they simply see a lot of zeros in their bank account and assume that they are comfortably on track when they are not. The simplest way to avoid this is to create a dedicated bank account just for a housing fund, and then quarantine it from any spending. There’s still the regular checking account to pay the rent and cable bills, but that special savings account is off-limits no matter what.

    Make Savings Automatic

    Once there’s a dedicated savings account, most payroll departments will direct deposit to the account, sending the balance to the checking account as usual. For most people, savings happen regularly and if they’ve built a good family budget, they don’t even notice. The idea, as most finance gurus like to say, is to pay yourself first so there’s no excuses.

    Save 100% of Any Windfalls

    For someone getting a $3,000 tax refund or a nice year-end bonus, it’s tempting to splurge a little even while saving a little. But building up a down payment requires a lot of discipline and restraint. That applies to both day-to-day expenses as well as one-time infusions of cash. With a good family budget, there’s no real “need” for any of that extra money. It’s perfect for saving.

    Save In Big Chunks

    Sure, it’s possible to save a few dollars each week by using store-brand laundry detergent instead of Tide. But cutting out the biggest expenses will have the greatest effect. Skipping the annual trip to the mountain cabin won’t be easy. And that old car with the dented fender may be a bit embarrassing to drive for another year. But whenever possible, eliminating big bills instead of pinching pennies is the most effective way to build up savings quickly. Remember that the new home will be enjoyed for years, maybe even decades, to come. The short-term sacrifice will be worth the long-term reward.

    Downsize Before Upsizing

    Moving to a one-bedroom apartment from a two-bedroom apartment can drop monthly rent by 20% to 30% in most areas. If kids aren’t an issue, it may be a smart move to live small before moving into a larger home and reallocate the unused rent to the housing fund.

    Save Less For Retirement

    With a 401(k) match, it’s always a good idea to contribute enough to qualify for the employer-sponsored matching contribution. But typically, matches stop at 6%, so saving for a house may mean capping retirement contributions and allocating the additional cash toward the down payment savings. Remember, a house is also an asset and a home is just another way of saving for the future. Another option for first-time home buyers is to use retirement savings in an IRA to fund the purchase. In many cases, $10,000 can be withdrawn from an IRA without penalties to help fund a home purchase.

    Don’t Punish Yourself

    The math of saving for a house may be straightforward, but the emotions of saving are very complex. If the down payment savings process feels painful and frustrating every day, the chances of being successful at it is small. So, rather than let the frustration build up after you denying what seems to be every discretionary expense, take comfort in a simple pleasure once in a while. Cut down on eating out, but consider cooking a fancy dinner once a week at home with premium ingredients. Cut down on going to movies, but maybe subscribe to Netflix instead. The idea is to save money, not to spend zero, and most folks find it much easier to save if they’re actually enjoying their life while doing so.

    Gifts

    A conventional mortgage generally requires the buyer to make a down payment of at least 5 percent of the purchase price and FHA loans require a minimum 3.5 percent. But a down payment of less than 20 percent of the full purchase price on either loan will required mortgage insurance, called PMI on conventional loans and MIP on FHA loans, which generally adds between 0.5 and 1 percent of the loan amount onto the house payment each year until the loan is 80 percent or less of the value of the house.

    Raising the 20% down payment to supplement a homebuyer’s savings can save a substantial amount over the course of a loan and some homebuyers are lucky to have a friend or relative willing to give a cash gift to help with the down payment. But using gifted monies may not be as simple and straightforward as it seems. First, the gift must be documented with a formal “gift letter.” The mortgage applicant must be able to show a paper-trail, showing the gifted monies moving from the gifter’s account to the home buyer’s account. Finally, the mortgage applicant must be able to prove that the gift is not a loan-in-disguise. Home buyers are permitted to accept up to 6% of a home’s purchase price in the form of a cash down payment gift.

    Home equity gifts are more and more common in today’s marketplace since homebuyers want to reach the 20% down payment threshold. With a 20% down payment, homebuyers can often qualify for the lowest mortgage rates offered by their bank. And with 20% down, there is no accompanying PMI (private mortgage insurance) or MIP (Mortgage Insurance Premium). Furthermore, with 20% down, buyers can seek loans backed by Fannie Mae and Freddie Mac which, over thirty years, may be cheaper than using an FHA loan.

    To get the lowest possible interest rate and avoid private mortgage insurance, it is best to have a down payment of 20 percent — a lot of money when you consider the price of houses. These simple suggestions can get a first-time home buyer on track for saving the tens of thousands of dollars necessary for the purchase. With interest rates still near historic lows, there’s not a better time to get started. And whether structuring a gift from a family member or just figuring out the best mortgage product to get the lowest interest rate and closing costs, there’s not a better guide through the mortgage and home-buying process than a Sales Executive at The Trembley Group Real Estate.

     

     

    Need help? Call The Trembley Group at 843.945.1880 ext. 1 and we’ll help you look for the perfect listing or buyers agent!

    At The Trembley Group, we pride ourselves on being the experts at more than just selling real estate. We are local residents, some of us have been here for a lifetime. The rest of us will be here until the end of time. We love living, working, and playing in the diverse backyard of Coastal Carolina, and look forward to helping you live and love your dreams soon too. Please reach out to us by phone or email for personalized service and one-on-one advice. 

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