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?