The Time I Change My Mind About Saving 20% for a House

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Remember that old post I wrote a few months ago about how we’re going to save 20% for a down payment no matter which way the mainstream real estate market pressures us?

We’re kind of changing our minds.

I know. I said I wouldn’t let the market pressure us… but by golly, it has.

Here’s the thing: there are murmurs that things are a’changin in the housing market. According to a lot of things I’ve read and close friends and family members I respect working in the mortgage loan industry, now is the time to buy. Especially in this area. And I know, every year has been the Year to Buy since 2008, but rates are going up. Housing rates. Interest rates. And possibly private mortgage insurance minimums.

Of course, there is no guarantee that will happen, and this is all speculation. But what if it does? 

Let’s see how that may influence our home-buying process. Here are two examples for a home value at $200,000 with an excellent credit score. (This isn’t necessarily the amount we would buy, but it’s just an even number for this example.)

Scenario 1: Buy this year and put 15% down at 4% interest rate on a 30-year loan

House Value: $200,000
15% Down Payment: $30,000
Loan Amount: $170,000
Interest Rate: 4%

Monthly Payments:
-Mortgage $811.61
-Taxes & Insurance: $216.67
-PMI: $80
Total monthly payment: $1,108.27

Scenario 2: Buy next year and put down 20% at 5.5% interest rate on a 30-year loan

House Value: $200,000
20% Down Payment: $40,000
Loan Amount: $160,000
Interest Rate: $5.5%

Monthly Payments:
-Mortgage: $908.46
-Taxes & Insurance: $216.67
-PMI: $0
Total monthly payment: $1,125.13

It’s that pesky old private mortgage insurance! If it weren’t for that I wouldn’t feel bad about putting less than 20% down. But be that as it may, a credit rapid rescore service will still save us a little each month, and allow us to be in a house a year sooner. After two to five years we can request to take off the mortgage insurance. It may cost a few hundred dollars, but it would reduce our monthly payments to $1,028.27, which is about a $100 difference a month from Scenario 2, all because of the interest rate difference.

Let’s pretend interest rates just rise to 5% next year. If we lower Scenario 2 from 5.5% to 5% putting down 20%, the monthly payments would be $1,075.58, which is better than our Scenario 1 example, but will still be $47  higher than when the PMI is taken off.

Another thing to keep in mind is that the prices of houses may be going up. The $200,000 house on the market today could be worth $230,000 next year. So even though we are saving up 20% for a house, it may not get us as much as it could this year and we may need to wait longer to get exactly what we want with the right percentage. The hypothetical $40,000 we save for our $200k house today may only get us 15% in the location and style we want next year.

Also! The rules about PMI may be changing. Banks could start to require 25% or 30% down before the PMI is waived, which would defeat the purpose of saving 20% altogether if they happen the switch the rules on us when we were still saving.

Is this making any sense?

The point is — we want to be very smart about this big, scary decision. I don’t think that this is the year to buy for everyone, but it could be the year for us. We don’t want to be scared by the market changes and rush into a foolish decision. But at the same time, we don’t want to be so close-minded that we end up losing a good deal.

Right now we are on track to have between 10-20% saved in the next few months (depending on the price of the house), and not including our emergency fund, which we wouldn’t include in our deposit. Patience is our biggest asset in finding the perfect house for us, which is why we want to start the process sooner than when we originally planned to give us plenty of time to look for the right place. Ideally we would have 20% and avoid PMI, but we have come to terms that if it’s lower than 20%, the house is less than we can afford, makes financial sense in the long run, and meets all of our criteria, then that will be the best option for us.

So, all of this to say: We are starting to look for affordable real estate in utah. (Eeee!) As in, get approved by the bank and start searching for real estate agents. Our apartment lease is up in October and ideally we would have a house by then, but we know that this process may take months and months to find the perfect home and want to start looking sooner than later.

What do you think about the market? Is it the right time to buy?
Would you wait until you had 20%, no matter what? Or do you think it’s worth getting a house before rates increase?
What would you do in our situation? :)

PS – Please keep in mind these are ALL speculations and hear-says on the market. I’m not a financial planner or real-estate expert. :)