Have you noticed the big home finance companies desperately touting their low-down-payment deals?
You’d think no one wants to put 20% down anymore!
But interest rates are high, so keeping your debt high is a pricey thing to do. Therefore, it can make sense, for those who can swing it, to:
- Put as much money down as comfortably possible, and…
- Jump into the market, and get busy paying that monthly mortgage down, for an easier time in your retirement years.
Let’s explore the case for getting aggressive with an investment in a home.
Just Do It? They Earlier the Purchase, the Sooner the Mortgage Pay-Off
OK, that makes sense, right? But you might ask: Is this the right time in my life to buy a home? Should I wait for a better market?
This is a complicated question. We are not financial advisers, and cannot guide your investment decisions. As buyers — assuming we can qualify for financing — each individual or household must make that decision for ourselves. And only by consulting with your own financial adviser can you receive guidance that fits your particular situation.
That disclaimer made, we can say something in support of getting started on ownership as early as possible. Obviously, taking out that loan as a younger person will — if the buyer can faithfully make monthly payments — end the mortgage earlier in a homeowner’s life.
A 30-year mortgage, if begun in the middle of life, can stretch into those golden years. If you’re 36 or 37 years old (like today’s typical home buyer), you’ll be in your late 60s when the mortgage wraps up. Not that there’s anything wrong with that. It’s just important to know how long your income needs to take care of the mortgage debt.
Some try to pay off their mortgages faster at some point, by paying more principal off than required when they can. Others prefer to keep their mortgages as long as possible, paying down credit cards or other, higher-interest debts instead. Either way, it’s important to keep the long term in mind.
OK, now let’s talk about the current market, and the benefits of making a decent-sized down payment.
Whew! What a Time to Be House-Hunting…
There’s a lot to be said for an ample down payment right now. When interest rates are elevated, it takes longer to break even on a home. This is why, today, a typical down payment is somewhere around 15% of the home’s price. That typical down payment, for many, adds up to somewhere around 30K. And that’s higher than the typical down payment has been in earlier years. People are less willing to be saddled with elevated interest rates. They are minimizing the cost of the debt they take on by gathering more up front. (Of course, not everyone can do this — which means typical home buyers keep getting wealthier than they used to be.)
You know how the credit companies and real estate agents often say buyers need to live in a new home for five years to break even on costs, and sell at a profit? Well, an extraordinary thing happened in this expensive housing market. Those who buy now might need to keep their homes ten to fourteen years before that break-even mark. Most people plan to hold their homes at least that long, but the point here is that now, they’ll have to — or lose value. Why is this? The housing market hasn’t been this hard to crack for four decades! Anyone shopping for a home right now has to contend with a combination of high prices and high interest rates.
A few months back, a reporter at CNN put all this in one helpful nutshell. “With mortgage rates crossing over 7% in recent weeks and home prices rising,” the reporter said:
[H]ome sales have plummeted over the past year. Prices are staying high because inventory remains stubbornly low as climbing mortgage rates are keeping people who have ultra-low interest rates from wanting to sell.
So the issue is two-fold. For one thing, mortgage rates hovering between 7.5% and 8% have put mortgages out of reach for many. For another thing, those same interest rates understandably deter people who already own homes from putting those properties on the market, and giving up their much cheaper mortgages.
Well, first-time buyers have to start somewhere! And so they are. A third of today’s buyers are first-timers. Just this month, in December 2023, a survey by Bank of America dropped. It showed that 62% of hopeful home buyers are staying on the sidelines in hope that mortgage rates will cool. Early this year, 85% wanted to wait. In other words, people are tired of waiting, and those who can manage to buy are doing just that.
Options Exist, If You Can’t Get a Large Down Payment Together
Granted, for most first-time buyers, gathering any down payment is a pretty big feat. It’s especially hard to do for those coping with high rents and student loan debts. And say you’re one of the people dealing with this high-rent environment, and that’s hindering your savings. If so, there are options.
Here are some of the best spots to uncover low-down-payment offers:
In addition to low down payment programs on loans
- FHA loans. These are backed by the Federal Housing Administration. Borrowers need to plan for the extra cost of private mortgage insurance on FHA loans.
- Loans backed by the department of agriculture (USDA loans). These even offer no-money-down options, with no private mortgage insurance charges. But there are guarantee fees and eligibility requirements you’ll need to review.
- Loans backed by the Veterans Affairs department (VA loans). These, too, offer zero-money-down options and don’t charge private mortgage insurance. Here again, fees and eligibility rules are in play.
- Other entities, including states and nonprofits, offer certain affordable loan options for those who qualify. Check out further information on affordable loan options here.
And of course, don’t forget to check out what those big companies are selling. Some are covering the private mortgage insurance, even where borrowers cannot readily put 20% down. Others are helping borrowers by covering appraisal costs, or through rate buydowns.
Finally, pay attention to progress on HELPER Act (for people working as first responders or educators), and anything the federal government is hashing out to support home loan affordability.
This might be called “a bad time to buy” — but…
We hope this overview demonstrated that there are people refusing to wait, and that pathways into the market do exist or are currently being crafted.
Supporting References
NPR’s All Things Considered, from Scott Horsley with Ari Shapiro, NPR News via NPR.org: Many Say It’s a Bad Time to Buy a House. So Who’s Still Going for It? (Nov. 13, 2023; citing data from the National Association of REALTORS®).
Brianna Crane for Axios: New Homeowners Won’t See a Profit for Over a Decade (Oct. 22, 2023; citing Zillow stats).
Nupur Anand for Reuters.com: More U.S. Home Buyers Willing to Purchase Despite High Rates (Dec. 4, 2023; citing Bank of America research).
Sarah Marx / Realtor.com® for HousingWire via Yahoo Finance: Homebuyers Made Larger Down Payments as Mortgage Rates Surged in Q3 (Nov. 15, 2023).
And as linked.
More on topics: Down payment tips, Fair housing opportunities
Photo credits: Karolina Grabowska and Mart Production, via Pexels.