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.