On Saving 20% for a Down Payment

The other day I realized that I missed two important anniversaries this month: the date I started this blog (four years ago March 3rd), and the day I became debt free (two years ago March 4th).

Debt free. I love those two words. I think of all the hard work it took to pay off. The sacrifices. The emergencies that made me fall behind. The blessings and unexpected gifts that pushed me forward. As hard as it was back then to pay off debt instead of spend money on fun things, I am so thankful that I did it when I did.

I feel that way about saving for a house deposit. It is so much sweeter saving than paying off debt, since I’m technically paying myself, but the practice is no different. Each month a large chunk of our paychecks go to our house deposit fund. We go through the motions and every once in a while step back and look how far we’ve come. But mostly we ignore it and keep on keeping on.

J and I had a heart-to-heart a few months ago about the whole thing. We both agreed we wanted to put a lot down, but neither of us really sat down and looked at how long that would take and what our goals were. The hardest decision is where to live. There are a ton of places in the area near our work (Durham, Raleigh, Cary, Apex, Chapel Hill, Morrisville, Carborro… too many!), and they all differ on price and preferences. We aren’t ready to nail that detail down yet, but the one decision we have made is to put no less than 20% down for the down payment.

Why we are saving 20% for a down payment

The reasons:
1. To avoid Private Mortgage Insurance. Most banks require Private Mortgage Insurance (PMI) for homebuyers who obtain loans less than 20% of the sale, to safeguard the lenders. This insurance doesn’t add up to that much per month, but it’s still an expense I’d rather not pay. For example, if you have a $100 insurance payment each month, over the course of a 30-year mortgage, that is $36,000 to pay the bank just for borrowing money! (Although, I have read that you can request to get this lowered after a few years of paying back your mortgage, but still. It’s a lot of money.)

2. To lower our monthly payments. The more money down, the smaller the mortgage, and therefore the smaller the monthly mortgage payments. We want our monthly payments to be less than what we pay now in rent, for a couple of reasons: First, so we have less to pay. Isn’t that what everyone wants? Secondly, there is no guarantee we will always be making what we do now. Of course neither of us are planning on quitting our jobs anytime soon, but if I suddenly am pregnant with triplets and need to stay at home, we don’t want to feel trapped with a huge mortgage payment we can’t afford on one paycheck.

3. To get a lower interest rate. The more money you put down, the lower the interest rate is. When you’re talking about a 6-figure home, even a decimal lower in your interest rate can mean thousands of dollars in savings in the long run. (Do you see a theme here? In the long run….)

4. To instantly build equity. Boom. You already have 20% of your house paid off.

Y’all, buying a house is scary. And 20% is A LOT OF MONEY. It is taking us years to save, and part of me is afraid house values and interest rates will inflate again before we commit to our own place, but that’s a risk we are willing to take. Everyone is different, and I know that most people aren’t worried about the things above, but for us, I think this plan will give us the most financial security in the long run.

This means, of course, that it’s going to take us longer than we anticipated to buy. Our goal was the end of this year, and I suppose we could still do that if we bought at the very lowest end of our budget in the least attractive area, but most likely it will be next year. Plus we aren’t willing to throw our emergency fund into this deal. (Because buying a house doesn’t fit our definition of an emergency.)

It’s hard sometimes to keep plugging away with your financial goals, isn’t it? But just like I am reaping the rewards of paying down my debt a long time ago, I know someday I will reap the rewards of saving much for our house. And that will make all this waiting and saving worth it. Hopefully. :)

I’d love to know:
How much did you, or do you plan to, put down on your house?
Do you think 20% is a thing of the past, or a good rule of thumb more people today should practice?
 

PS – Our house-hunting priorities.



  • Meg

    My husband and I are also beginning the potential home buying process and want to put at least 20% down, for all the reasons you listed above. Also, I feel like by saving a bulk sum (for both a downpayment and potential repairs/closing costs/other fees associated with buying) we are giving ourselves more of a buffer. Buying our first home makes me a bit nervous as this will be the largest purchase we have ever made and a purchase that has so many with so many potential outcomes with the market and repair incidentals.

    Do you have any thoughts on buying vs. renting? My husband is in grad school so we won’t be in our current city for more than 4 more years.

  • We have PMI and hate it! It’s something that we didn’t think about when we bought.

  • I think 20% sounds like a good idea. We are saving for a minimum 15% because that`s what you need to have if you want a mortgage. All first time buyers under 34 in Norway need to have a 15% downpayment, and second time buyers need to have a 25%. Housing prices has boooooooooomed the last couple of years, so unless we want to buy something terribly old and shabby in a godforsaken place, it`s going to take some time to save up that downpayment. If we want something decent, we`ll need (per housing values today) at least $80k. preferably $100k if we want some space. I´m just hoping that this extreme housing inflation will cease to end soon…

  • Kelsey

    Love! We are working on 20% also, hoping to reach our goal in November! Yay! We live in rural Oregon so houses and property are fairly inexpensive. Good luck with your savings! I’m already decorating the house we haven’t bought yet (in my mind).

  • Ha! I’m with you on the decorating part! I’ve done that too. ;) That’s great you should reach your goal in November. What a great accomplishment!

  • I also think it’s a great idea to have some money saved for repairs, fees, etc. since those inevitably come up when buying a house.

    As for renting vs. buying, I have heard if you don’t plan to live there five years or more, then you should rent. That said, people move all of the time, and you could use it as a rental house for an income property. But if you know for sure you have an expiration date in that city, until you’re sure it’s more permanent.

  • I didn’t know much about PMIs until I started researching the home-buying process and talking with friends. It really makes home-buying much harder because 20% is a LOT to save for!

  • Hmm, that’s interesting there is a minimum in Norway. It’s so interesting how the markets change all the time — $100k for a downpayment is crazy!!

  • Love this. Go you guys! We put down 20% exactly for all the reasons you listed. We were at a Super Bowl party literally the night of the day we put the offer on our house and I remember an acquaintance saying “no one puts 20% down when you buy a house anymore”. He didn’t know that we were doing just that. He actually didn’t put anything down on his condo, has a 6-7% interest rate and must live with a roommate to make his mortgage. So…I’d say waiting and saving and aiming for that 20% is by far the best option!
    Another metric we used when house hunting was the percentage of our net income that our mortgage payment would be. I’ve seen all sorts of recommendations, but we wanted to stay below 25% of our NET income (which is still quite high since our rental payments were literally like 12% of our net income!). We are right around that mark, maybe a little below and I’m not sure how I feel about that now. I’m trying to discern if my current job is one where I want to be at long-term. If not, it’s possible I could take a pay cut. Luckily, my husband was blessed with a new amazing job last fall, so any pay cut I may take, he has been/will be making up for in guaranteed raises over the next 30 years of his career.
    Anyways, you guys can do it! P.S. I LOVED apartment living! There are pros and cons to both, obvi, but enjoy it while ya can! Soak up every second of those maintenance-free/home-free weekends. ;)

  • Go you guys! Love this! We put down 20% exactly for all the reasons you
    listed. We were at a Super Bowl party literally the night of the day we put the
    offer on our house and I remember an acquaintance saying “no one puts 20% down when you buy a house anymore”. He didn’t know that we were doing just that. He actually didn’t put anything down on his condo, has a 6-7% interest rate and must live with a roommate to make his mortgage. So…I’d say waiting and saving and aiming for that 20% is by far the best option!
    Another metric we used when house hunting was the percentage of our net income that our mortgage payment would be. I’ve seen all sorts of recommendations, but we wanted to stay below 25% of our NET income (which is still quite high since our rental payments were literally like 12% of our net income!). We are right around that mark, maybe a little below and I’m not sure how I feel about that now. I’m trying to discern if my current job is one where I want to be at long-term. If not, it’s possible I could take a pay cut. Luckily, my husband was blessed with a new amazing job last fall, so any pay cut I may take, he has been/will be making up for in guaranteed raises over the next 30 years of his career. Anyways, you guys can do it! P.S. I LOVED apartment living! There are pros and cons to both, obvi, but enjoy it while ya can! Soak up every second of those maintenance-free/home-free weekends. ;)

  • We put 20% down, and then put a lot of money into the house to fix it up ourselves. So after just a few months of owning we had significantly more than 20% equity since we had made so many improvements and increased the value!
    Don’t rush the process. I’m a big believer that when you see the house for you, you will know it. Each of our properties took about 6-10 months to search for before we purchased, and we couldn’t be happier with each of them!

  • Rebecca

    During my less-wise days, my husband and I bought a condo with less than 20% down. We were caught up in buying a condo without really thinking about what we were doing. Thankfully, we bought a condo we could easily afford which had instant equity because it was a really good deal, but we are stuck paying PMI for 5 years (our bank won’t let us get rid of the PMI before that time frame even though we have more than 20% equity in our home).

    Another thing I really wish I would have considered is buying my forever home right away, or at least a home with a lot of room to grow. We bought a two bedroom condo, and while it’s big enough to keep us happy for a long time, I really don’t want to stay and work on paying off our mortgage because our HOA fees are really ridiculous. I wish we would have waited longer to buy and bought our forever home first with 20% down so that we could have just stayed there and paid off our mortgage. Buying and selling a home is very expensive (realtor, appraisal, inspection, etc) so if you only have to do it once you can save a ton of money.

  • I love it when you pipe in, because you and your husband did it all perfectly, in my opinion! :) Haha that’s funny (and a little sad) about your friend. 20% is definitely not the norm! Good point about the percentage of payments… we pay about 19% of our budget on rent, and would love to stay a little below that whenever we get a house, but who knows.

  • You are absolutely right: the biggest advantage, and hardest part of the process, is patience. When the time is right, we will know, but it’s hard to not rush it! Thanks so much for your advice!

  • We have talked A LOT about getting into a smaller town-house earlier vs. waiting for a single-family home. They both have their pros and cons, but eventually we decided we need to find our forever home (or at least could be if we wanted it to), especially since we will be starting a family in the next few years and don’t want to out grow it too fast. Thanks so much for your advice, Rebecca!

  • Kristen

    We put 20% down on our first house, but not on our second. Wanted to take advantage of the low low interest rates right now and calculated that we’d be better off financially in the long run by paying PMI for 5 years (there are some rules I can’t remember for how long you have to pay PMI- either a min of 2 or 5 years, until the equity reaches 20%) and having a 3.875% interest rate, than paying no PMI and having a higher interest rate.
    Good for you for knowing what you want and being so disciplined. Love your blog!

  • Michelle’s Finance Journal

    We need to start saving for a down payment, but my husband and I haven’t come to an agreement. I want to wait until we save 20% and my husband wants to go with as little as possible because he wants to take advantage of the interest rate. We still have so much debt and we’re accruing more since he’s going to MBA right now. I need to really put 20% into my husband’s head.

    http://michellesfinancejournal.wordpress.com/

  • Shoestring

    20% sounds like a great plan. Pre-parenthood is the time when you have the most cash so it really does make sense to save as much as you can if you are going to buy. We’ve just bought our second place and put down a 20% deposit, using the equity from the sale of our flat. We got an incredible deal on the house as the seller wanted to move quickly so – going by market value – we actually have around 30-35% equity. I’d have to agree that it is better to go straight for the forever house if you can afford to do it that way. It took us FIVE YEARS (on and off) to actually sell our flat and being ‘stuck’ was a nightmare. It also gives you chance to do some decorating before you have a family to think about :-) . Really looking forward to hearing about your adventures in buying.

  • Mrs. Pancakes

    Sometimes it’s so much easier to be like everyone else and take the easy way out doing the less than 20% but like you said the rewards at the end is so much greater than the immediate satisfaction of bring in a house!! Happy anniversary!!!

  • Congratulations on the 20% commitment. It isn’t going to be easy but the wait will be worth it.

    Kindness is the best accessory,
    Rebecca

  • Whitney S.

    This blog is great. You can do it!!! Don’t give up because of what “everyone else” is doing. We’vebought 2 homes, one with no money down. Because of that our payment was high. We had a big house that I dreamed of, but it came with a big mortgage. Since then we downsized and on house number three we will take in no less than 20%! It will forever change your quality of life, freedoms, and happiness. Set up your future the right way. Go girl!!!

  • Job

    Lol.. Ur a Jesus follower and u found it important to mention that.. Religious nut.. Anyway I thought ur post was great as I too have been saving for that elusive 20% although the temptation is too great and I want to buy the home without the 20%..

  • Rheinee

    Hi Gina!

    My boyfriend and I have been saving up for down-payment and we are doing great so far. Thanks to this your post, I am even more motivated to save up more for that future down-payment so that in the long run I would save more money and I would not have to be too scared of not making the monthly payments if I ever lose my job. Great job on your post!

  • Woohoo! You can do it! Good luck as you continue to say and start to house hunt. :)

  • Aus saver

    In Australian cities 20% starts at 80-100k for units and houses in dodgy suburbs. At 25 I spoke to my bank today to start my second sub account for savings. I hope to buy by the time I’m 30.