Home > Mortgages > Should You Save for a Down Payment Or Buy a Home Now?

Comments 0 Comments

Are you saving up to buy a home down the road? It makes sense from a personal financial planning perspective, but when it comes to whether it actually helps you get your foot in the door, you may want to reconsider.

Why? In most cases, your ability to save is going to be at a much slower pace than the rate of appreciation of homes around your area. Put simply, if home prices in your area are on the rise, or interest rates go up, you may need to double or even triple how much you save on a monthly basis to keep up. In this case, time is money — the longer you take to save more money, it may just go toward offsetting a higher housing cost when you do finally pull the trigger, rather than lowering housing costs as most might think.

If you have nothing for a down payment at this time, it makes sense to continue to save. However, if you do have the cash now, the numbers may work in your favor. Let’s go back in time a bit to see how this works: Say you purchased a home in 2010 in Sonoma County, Calif., with an FHA loan at 3.5% down. The home value/purchase price back then was $275,000 and you put down $9,625 at closing, the minimum FHA contribution needed.

Fast-forward to July 2013. Assuming you took out a 30-year fixed rate mortgage, and diligently paid down your principal and interest each month (since 2010) while the economy gained momentum. At this point you would have accumulated at least 20% equity just by getting your foot in the door. Your mortgage would have been paid down to approximately $255,000 and you would’ve accumulated enough home equity by virtue of the amortization balance pay-down to have an opportunity to refinance.

Fast-forward to now, 2015. Housing prices have continued to rise based on real demand vs. supply (not an inflated market created by credit products pre-2007), and now you probably have 40% equity or more in your home, giving you a bigger chance to refinance your house — if you didn’t back in 2013.

Can You Afford to Buy a Home in 2015?

As the economy continues to improve, driving housing demand, the answer is yes, you can. While there is no crystal ball to say for certain what the future holds, consider that if prices continue to rise, homeowners would benefit by the consistent monthly increase in lendable home equity. This equity can be used to reduce your mortgage payment or switch to a shorter fixed-rate term in an effort to pay off the mortgage faster when refinancing.

If you have at least 3.5% of the purchase price to buy a house — or more conservatively, 5% of the purchase price — you can probably make a good case for buying a home, knowing that you’re likely to continue to accumulate equity.

Now or Later

Keep in mind, this scenario assumes house prices continue to go up. It represents what the numbers would look like if you were to buy a house with today’s interest rate and housing environment with 5% down, assuming a price of $425,000. Or, if you decide to wait until you’re more comfortable with a 10% down payment, assuming housing prices continue their upward momentum and interest rates follow suit by trickling up, housing will cost more. A $425,000 house today could cost you $50,000 in purchase price for that exact same house and $426 per month more in mortgage payment — even by forking over more cash by the time you have it.

Other Factors to Consider

  • Private mortgage insurance (PMI) is a lower factor on loans $417,000 or lower
  • If the loan amount exceeds $417,000, 10% down is needed for a conventional loan; however, it’s still 3.5% for FHA

Even with more skin in the game in the above scenario — notice the change in private mortgage insurance (PMI). The property taxes would also be higher, again pointing to a potential higher future cost of housing.

The point is, if you can afford a mortgage payment with today’s home prices and interest rates and you have at least a 5% down payment (or 3.5% FHA), as well as money for closing costs, it might better serve you to purchase a house while you can before the same house in the future costs you more because you’re simply electing to put more money in when it might not be necessary. Moreover, if this scenario plays out, you could always refinance your house in the future to take advantage of the additional equity accumulation on a conservative fixed-rate principal and interest mortgage.

Weigh your options, and also consider how much house you can afford — and how much money you could save in the long run. Coming to the table with good or excellent credit can give you access to better interest rates, which will also save you money in the long term. You can get your credit scores for free at Credit.com to see where you stand, and to determine whether you need to work on building your credit beforehand.

More on Mortgages & Homebuying:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team