Twenty

Girl Ninja and I have been saving hard. Had we not bought a car, and had I not started MANteresting, we would be reaching our $100,000 savings goal  right… about………… now. But since we dropped a little extra coin this year, we are about six months behind schedule. As you also know, I’m thinking interest rates will slowly begin creeping upwards by mid to late 2013.

I’ve been watching Seattle real estate pretty closely and from what I gather, the local market seemed to bottom around summer 2011. While prices aren’t at pre-recession levels, they’ve definitely been ticking upwards for over a year. It’s not uncommon for a fairly priced house to sell at or above asking price, with multiple offers, in less than a week. Median home prices in Seattle are up 12% in the last year. It’s crazy.

Girl Ninja and I hope to begin walking through homes in January. We will put in an offer as soon as we find a place that captures our hearts. In my perfect world, we’d find a great house before April as the number of people looking to buy typically drops in the winter. Less competition means a better deal for us. 

Since we could potentially fall in love with a place pretty soon, it’s time I really start breaking down the numbers. Specifically in regards to the down payment. Girl Ninja and I have enough in the bank to put 20% down on our future place, but part of me doesn’t want to.

The 20% down figure is popular for two reasons. First, if a buyer can save up 20% of the purchase price of their home, that generally implies they are responsible. Likely responsible enough to buy a house. Second, 20% down gets you out of having to pay private mortgage insurance (PMI). PMI can be quite costly. For example, throwing 10% down on a $350,000 house would leave us with a $151/month PMI bill. PMI is not an investment, it’s an expense.

That said, there are number of reasons putting a smaller amount down (10%) appeals to me. Here they are in no particular order…

1. Putting almost all of our liquid assets (cash) in to a single illiquid asset scares the bajeezus out of me. I mean, I would never just invest $70,000 in a single stock. Why the heck would I do that for a single house? Especially when things like hail storms, or a great recession, are totally out of my control, but can significantly reduce the value of my property. Scary! I’ve said it before and I’ll say it again, I would NEVER pay cash for a house, and for those same reasons, I may not be willing to put 20% down.

2. Interest rates are stupid low. Like seriously the lowest they’ve ever been. And will likely ever be. Zillow tells me we would be looking at 3.145% APR on a $400,000 house if we bought today. That’s crazy. Why wouldn’t we leverage low-interest debt? If my student loans were at 2-3% like my sisters, I likely wouldn’t have paid them off so quick. My student loans, however were 7%. There was no way I could be confident that my investing skills could earn me a 7%+ return. It made sense to pay off my debt. But that wouldn’t be the case with a 3% tax-deductible APR. Heck, just a few years ago high yield savings accounts were paying 3%-4% returns, and inflation is gonna come around sooner or later. If we had a mortgage rate closer to 5% then I’d be all for paying down the loan faster, or throwing more money at the house up front.

3. Inflation will be my friend. Let’s pretend our mortgage payment is $1,500/month. Let’s say I currently bring home $4,500/month. A $1,500 payment would hurt for the first few years on that salary (33% of take home pay), but over time, the pain would significantly decrease as my salary adjusts for inflation. At 3% inflation, my $4,500 monthly salary would jump to $5,200 after five years. At the ten-year mark, I’d be bringing home $6,047. And 20 years from now, I’d be bringing home $8,127. My mortgage payment, however, would still be $1,500/month. As each year passes, the mortgage payment becomes a smaller portion of my take home pay. And let’s not forget, this example doesn’t take in to account ANY raises or promotions.

4.  20% down on a $350,000 house is a lot of freaking money. It scares me to think about writing a $70,000 check for a place I’ve never even stayed the night in. Instead, I’d prefer writing a $35,000 check (10%) and let the rest of the money sit in my bank account. If after a few months of really getting to know our house we felt like no major maintenance expenses were anticipated, we could pay down the loan with our savings and eliminate PMI.

5. There are alternatives to PMI. Single Financed Mortgage Insurance and Single Premium Mortgage Insurance are two such options. You can research them to get more info if you like.

So although we will have enough for a 20% down payment in the bank, we may not elect to go that route. We wont know, though, until we have found our first place. At that point we can run the numbers and see what makes the most sense for us.

How much did you (or will you) put down on your FIRST place? Why that amount? I know it’s easy to tell a stranger they should put 20% down, but is it always the right decision? Would you pay cash for a house?

33 thoughts on “Twenty

  1. I put down 20% on my house because I wanted to get best rate, have equity in my home, and avoid PMI. Not to mention my parents always told me to put 20% down. This also took place in late 2008 – early 2009 when lending tightened up.

    There is an argument to make for FHA loan and pay 10% or less, but I knew I would be in my house for an extended period of time and more likely than not, I do not plan on selling the property. Putting equity in the shape of 20% was an easy choice to make. Everyone is different as you stated in your post.

    Yes, I would pay cash for a house. However, there would be a threshold of how high I would go. That number at this moment would be 200k. My long term goal is to generate money in retirement outside of our pensions/401k/IRA’s with rental properties and would like to have positive cash flow through those houses with little to no debt. Buying a house in cash would be help realize those goals.

  2. I put down 50% on a 140k loan back in 1999. It allowed me to do a 15 year mortgage with an $800 month payment. Got married after 9/11/2001, which hit us hard jobwise, but because of a low monthly payment and still having a decent emergency fund we were able to hold on to the house. Paid off the house in 2008 because my interest rate was 6% and had the ability to easily pay off the remaining balance because we had become saving fiends after struggling after 9/11/2001. Compared to my past investments, my real estate investment has paid off the best which is odd because of where I live, Las Vegas which was decimated by the housing bubble created by banks giving out easy money with low interest rates and inflating home prices WHICH IS STRANGELY SEEMS DEJA VU to me right now…making me hesitate upgrading our housing situation right now grrrr…

    Even though my home is paid off, there is a cost. Because I had bought a starter home, my wife and I feel the need to upgrade to a more comfortable home in a better neighborhood. I wish I had the foresight and courage to have bought a nicer/bigger home so we wouldn’t have this urge to upgrade. Don’t like to move, it’s expensive.

    I don’t mind paying cash for a home but you better know EVERYTHING AND ANYTHING when it comes to what makes a home last forever. Starting with location (which takes care of taxes, schools, “better neighbors”), energy efficiency, build quality, open layout, single story, and storage capabilities are some of my top wants. There are numerous pet peeves I have such as house facing in regards to how the sunlight will affect the interior lighting of the house, distance of the hot water heater to my shower, how interior doors open (do they hit up against something), and the layout of the kitchen. I hate learning the hard way, but for some reason it just keeps happening to me, blech…

    From what I can tell, it seems like you are not truly ready to purchase a house. It seems like renting is a better fit still. Buying a home takes a great deal of commitment, like paying it off 🙂

      • Gotta agree with not buying a “starter house.” The hubs and I increased our budget by about $30,000 after looking at several homes so that we could buy a home that is large enough to accommodate the family we want. In the end we decided to put less than 20% down so we could maintain a solid emergency fund.

        We’ve been here two years and are now expecting our first child, and I am so happy that we can have more without needing to move. Houses are expensive. Buying, selling, and moving are expensive. If you and GN want a large family, I would seriously recommend just starting out in a house that will accommodate that!

  3. StackingCash: I liked your list of what your pet peeves are when looking at a house. My GF and I took a page out of the ninjas book and planned on exploring open houses, even though we don’t plan on buying one. I always wondered, other than determining if we like the overall layout, what should we be looking for? I envisioned myself walking around like an aimless fool (or zombie) looking into the closets and what not.

    Back to the original topic, 20% does scare me. Dropping a large chunk of cash for something that something that you have no idea about. I always have flashbacks to that movie The Money Pit with Tom Hanks and I slowly break out in a sweat lol.

    • There is quite a bit to look for when buying a house. Just ask some older homeowners things they like and dislike about their own home. Also getting a good home inspector will pay off in spades because they will let you know how much maintenance will be needed on the house from the roof, air conditioning/furnace, plumbing and electrical, mold or radon problems, etc. Also certain cosmetic details like flooring, cabinets, countertops, and faucets will be important because they can be so expensive. Out of those choices, I feel cabinets are the toughest to deal with, yet for me they make or break a home. Oh yeah, I never realized how important a nice toilet could be considering it is usually used quite often. Stuff we take for granted, n’est pas? 🙂

      The downside of knowing all this is you might become like me, too nit-picky and never buy a house. Gotta figure out what you can compromise on.

  4. I put down 20% on a $170k house in Pittsburgh. I chose to do that in order to avoid PMI and establish a greater portion of equity in the house. Two things to consider:
    1. I respect the idea of maintaining liquidity and would never advocate putting ALL your savings into the 20%, but avoiding an EXTRA, unnecessary expense like PMI could go a long way towards rebuilding your savings when Murphy strikes.

    2. Your payments on your home are almost entirely interest only for the first couple of years. So, even if you make a major payment to reduce the value of the loan, the home value may decrease and may still not be at 20% of the NEW value. So, you’d be out of luck if you tried to get rid of PMI.

    I’m a fan of home ownership. I enjoy the freedom it provides me (though that sounds counterintuitive). If I want to paint a wall, I paint. If I want to install a new appliance or fixture, I do it. I don’t have to worry about anyone telling me what I can and cannot do.

  5. You might want to talk to your mortgage broker about PMI removal that soon. I have heard of some requirements that you must have it for 12 months or more and/or you need to pay for an appraisal of around $400.

    Also, in a market where house prices are going up, appraisals are typically low and lag behind the times because they are now based on past sales alone and not future speculation.

    • I was going to say this same thing. I’ve heard it can be a PITA to have PMI removed.

      I put 20% down on my first house.

      • The broker that I spoke with said that for a conventional loan I would have to pay PMI for at least 2 years even if I reached 20% equity before that. For an FHA loan you have to pay PMI for at least 5 years. I haven’t bought yet because of this. I’m saving for 20%.

  6. We put down 50% as down payment in 2003. Our mortgage was $333 a month. Paid off the house in 2011.
    I would suggest that you calculate how much money you would need to live off in case there is no income for 12 months, add to that a nice amount for arranging the house, closing costs,… and then see how much you have left over and can realistically spend on a down payment.
    We choose this route as we always wanted to be able to cover all the spending from one salary just in case both of us would be without work at the same time.

  7. You might want to check but I believe that in order to have PMI removed you will have to pay down the mortgage to 80% of the APPRAISED value of the house. That means 2 things.

    1. You will have to pay for an appraisal to see how much you would need to reduce the mortgage.
    2. The amount you would need to pay down to get below 80% appraised value will fluctuate as the market fluctuates. i.e. If the market dips after you purchase a home, the amount you would need to pay down would INCREASE.

    Worth looking into.

  8. My boyfriend found a small house on 75 acres that he really wanted to buy back in the summer. He’d been watching the property listing for a while, and the price drop three times. When the final asking price reached 50% of the original, he jumped. He did his homework and discovered that the property was classified as a recreational property, and not residential, and therefore the mortgage rules were different. The banks and credit unions all required a 50% down-payment!!!

    Long story short, he ended up with nothing and the property is still for sale…

  9. I could be wrong but I believe you have to put 20% down in order to waive escrow. If you can waive escrow then you can hold on to your tax payment and home insurance in your own accounts and continue accumulating interest on that money until payment is due at the end of the year. This can be a significant amount since where I live property taxes for a $500,000 house are $12,000 per year and home insurance is about $3,000.

  10. You can’t just get rid of PMI by paying another 10%. I found this out recently, when I reached 20% equity in my home. I have to pay for an appraisal, even though I had one recently when I refinanced, and my appraisal must show that I’ve reached 20% equity.

    If I want to skip the appraisal, I have to wait until I reach 22% equity.

  11. I’m putting 10% down, because I don’t have enough to pay 20%! This will let me have some money in the bank after I close, so that’s good, but the truth is I just don’t have the money. I’m a naughty PF-reader.

    I did find a lender (a credit union with rigid membership rules that I happen to meet) that doesn’t charge PMI, but their closing costs are a lot higher than those at USAA, which had been my first choice for a mortgage lender. However, I’m buying a house that was a non-foreclosure flip, and the seller hasn’t owned it long enough for USAA to be willing to finance the sale. SO I am going with higher-closing-cost, no-PMI bank, and 10% down.

    I calculated that in order to have a full 20% down, I’d have to stay in my current living situation for at least another year. I really do not like my current situation and I’ve noticed a definite uptick in the local (Portland) real estate market that makes me think a year from now prices will be up quite a bit, meaning I would STILL not have the 20% saved up, and rates will start rising in about a year as well.

    In the end it seemed like a good call, but I suppose time will tell.

  12. I’m still a year or two or three out from buying. But like the good brainwashed-financial-student that I am, I’m saving to get to the big 2-0-%. I think the biggest reason I continue toward that goal is because it requires seriousness. That’s not to say that $35k or 10% isn’t a sizable chunk of change. But 20% is a whole lotta skin in the game. At 20%, I’m suddenly looking at my home much less as a “couple years” option and much more as a long-term investment and abode. And then like you and others have mentioned, avoiding PMI seems like a solid enough reason to cross that threshold.

    Fair warning, I will probably recant everything I just said once we begin home buying in a couple years. 🙂

  13. My first home was in 1973. It cost $36,500 and we assumed their mortgage because the interst rate was 5.25% and the prevailing rate was 7%. You could do that in those days. As I recall, I had to put down $10K which was about a third down. My mortgage payment was less than my rent. The property taxes and insurance added more to it. I bought the worst house in the neighborhood and it was $12K under market. They were going through a divorce and we got a great deal.

  14. Your PMI would “only” be $150ish? For real? When I was shopping my mortgage, if I didn’t put 20% down on a house in the $150k range, it would have been around $100ish/month. So I’m surprised it would be so small.

    I think you should really consider doing the 20%. For example, if you have a bad hail storm, your insurance should cover repairs. (Mine did — I have a new roof now).

    Also, are you SURE you could just pay down the balance to hit 20% equity in a few months and eliminate that PMI? There may be some red tape to jump through first. Other commenters are saying the same thing — PMI is a jerk to get rid of.

    By mortgaging 90% of the loan value, your payments will be higher than if you mortgaged 80%, and that’s something you’ll have to deal with for the life of the loan unless you refinance. Calculate the cost of that.

    We put 20% down on our house (though it was only a $165k house, so obvs a smaller down payment). I don’t regret it at all.

    Find out how much putting 10% down will cost you in actual dollars.

  15. We put 10% down on our first house, a modest townhouse. I had planned, as you, Ninja, to then pay down the additional 10% quickly, which we did. But then we discovered that removing PMI was not that easy. As others have commented, there is the cost of additional appraisal and the risk that the property has depreciated in value. Additionally, a conventional loan usually requires 24 months of regular payments before PMI can be waived. So it’s not going to be possible to waive your PMI at 6 months to a year. But this is something you have to check, maybe there are some variations.

    With our second and third homes, we put the 20% down and were glad that we did.

    I agree with a previous poster, if you are balking at 20% then you’re not quite ready to buy a house with the price tag you’ve chosen. If you feel 20% down is too much, it’s too much – can’t it be that simple, really?

    Your planning seems a bit rosy. Your step #3 – Inflation may not be your friend! Yes, your P+I stays the same, but you’ve left out property taxes. They pretty much only go up, and you have no control over the rate of increase. Have you added in the other costs of ownership – upkeep, repair, etc.? To budget upkeep, pick a percentage of the home’s worth, some like to use 3%, and plan to spend that amount per year to keep your house in good shape. It’s not just the basic structure but all the appliances, gardening, improvements, utilities… If you start out with your mortgage at 33% of your net income I think you may feel over-committed financially. Especially when a baby arrives.

    Our mortgage (P+I and property tax) is currently at 15% of our take home pay, the lowest in our 28 years of home ownership. All of the assorted expenses related to owning this home are another 10% of take home. So that’s 25% for the roof over our head. A lot of people would say that’s not bad. But with retirement looming and putting a kid through college we are strapped and falling short of all our financial goals. The expense of our home has been a major culprit in this. We started out at about 28% of net pay for our monthly mortgage payment, and it was too high, in retrospect. We thought it was reasonable at the time.

    I disagree with you on interest rates. I think that we will be in this low interest environment for a couple more years, so there’s no need to rush. It’s more important to be financially ready than to buy at the “best” possible time. The best time to buy is not when home prices or interest rates are lowest, but when doing so is a comfortable move for you. Though capitalizing on one or both of those trends does make it a sweet deal, indeed.

  16. We put down over 50% and paid off the loan in 7.5 years. The last 6 years there was not enough mortgage interest to take that deduction. We now have a paid-for home and come what may, we can keep it. Nothing feels as good as knowing that even a job loss (or two!) will greatly affect us.

    Taxes and insurance run about 2.5K a year. (escrow was 170.00 At the current .2% savings rate, it is not even worth keeping that amount in the bank! Now we put the house payment in the bank and are watching the savings grow month after month.

    Also, don’t buy a starter home. Buy what you will need in the school district you want for the kids you plan. Moving is expensive and Realtors eat up a good chunk of your potential profit quickly. You also do not want to be stuck in an area where you do not want your children to go to school.

  17. I just bought my condo in 2010, and I took advantage of a blended mortgage, putting only 10% down in order to keep my cash reserves at a comfortable level. I had 2 mortgages for a year which wasn’t ideal, but I sent every extra penny to the 2nd and refinanced ASAP. When I ReFi’ed, I saved a boatload of money and when all is said & done, my plan allowed me to knock years off my mortgage, save my cash, lock in an insanely low rate and lower my monthly payment. Super win in my book!

  18. We bought in the Seattle area June 2011 – looks like we hit the sweet spot 🙂

    That being said, we were able to get a VA loan due to hubby’s service, so we didn’t have to put 20% down to avoid PMI. If we didn’t have that option, we would have waiting until we felt comfortable putting down 20%, even if that meant a smaller/cheaper home.

  19. We bought our house in 2006 with only 5% down. We did an 80/15 mortgage to avoid PMI with an 8% second mortgage. It sounds really high now, but at the time, even 1st mortgages were 6.5%. We have since been able to refi the second into a 5% 15 year loan that will be paid off in about 4 years.

    While I wish we had saved 20% to put down (mostly because it would have prevented us from buying while the market was at it’s height), I can’t regret buying when we did because we love our home and neighborhood.

  20. I bought a starter home and loved it (put 20% down and stayed there for ~8 years, until I had a husband and two kids). I paid off half the mortgage during that time, which gave us enough equity to put down 20% on our current house. I agree that you shouldn’t use ALL your cash reserves (expect some big expenses when you first move in!) but if you can swing 20% I don’t see why you wouldn’t. It’s not working too hard for you in that savings account anyway….

  21. I put 0% down on my mortgage in February 2008. No regrets. Plenty of people put 20% down and still wound up underwater. I’d do the same thing if I were to do it again.

    I will say that refinancing was a pain since we didn’t have equity in the home, but we were finally able to refinance a few months ago at 3.125%, so I’m in no hurry to pay that down!

  22. We’re going to buy our first house in cash. I know it’s not right for everyone but we’re very debt adverse and this path feels right. We have $211,000 in our “house fund” right now which doesn’t touch our retirement accounts or our $10,000 emergency fund. We’re aiming to have at least $300,000 saved (which will be within the next 2 years) before buying.

    Good luck house hunting!

  23. We put 20% down on our 170k home bought in 2011. We were set against a starter home and so bought a four bedroom in a great school district. That represented less than 40% of our liquid savings at that time (with any other closing related costs included). It was very hard to hand over that check, and I hated to see the money go from savings, but we wanted to put 20% down. After buying, we spent money on some home improvements and new furniture, which we had also saved for. Our savings still have not been fully replenished. Home maintenance can be quite expensive also, unless perhaps you buy brand new or very close to it.

    I honestly wish we’d rented longer, as we were able to save tremendous amounts each month pretty consistently while renting. When we purchased, I realized too that the market had probably already bottomed, and interest rates were low. But rates are now even lower, and prices have not increased a lot in my area. I think the fed recently indicated it will keep interest rates low until unemployment falls to 6.5%, which may take years. Not sure how that impacts mortgage rates exactly, but I’m under the impression they may be quite low for a while.

  24. I put down 25% on my condo. BOO YA! I was able to do that by saving a ton and finding a reasonably priced place. I was very, very patient to find a place I would be happy in while not going over my 20% limit.

    I am in the process of a refinance right now that will bring me down to a 15 year fixed at 2.875%.

  25. Yikes, I hate this question. We had just graduated college and put down exactly $0 on our house. We bought at the absolute peak of the housing market but it wasn’t that risky for us for a few reasons. We took a loan for half of the amount we were approved for, we could comfortably pay our house payment on one salary (and we had two), we were not planning on moving, and we live in a town in Texas that did not have much fluctuation in house values over the last 10 years despite the bubble and recession. But if we bought one now we would put down 15-20 minimum, most likely more. I HATED that only 130/month went towards principle.

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