Author Topic: Saving for a 20% down payment on a home  (Read 1139 times)

FIRE for Gen Z

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Saving for a 20% down payment on a home
« on: July 12, 2018, 08:15:25 AM »
https://www.washingtonpost.com/news/where-we-live/wp/2018/07/12/why-its-more-realistic-to-opt-for-a-low-down-payment-and-private-mortgage-insurance-rather-than-saving-20-percent/?utm_term=.0c0ea01f8979

Absolutely hilarious article in my opinion. If you don't care to read it, it asserts that a 20% down payment for a house simply "isn't realistic" and that in California, "It would take an average of 36 years for someone earning the median income in the District to save for a 20 percent down payment on a median-priced house," and 37 in California.

With this sort of data, I would think the author might come to the conclusion that people are terrible savers, not to the conclusion that they should advise people to add thousands more dollars onto the composite price of their homes by taking private mortgage insurance. And, of course, there is no mention of the terrific benefits of renting, as discussed primarily on other FIRE blogs.

Dabnasty

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Re: Saving for a 20% down payment on a home
« Reply #1 on: July 12, 2018, 08:23:52 AM »
If it takes 36 years to save 20%, does that mean it'll take 180 years to pay in full? Can you even get a 150 year mortgage?

Raenia

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Re: Saving for a 20% down payment on a home
« Reply #2 on: July 12, 2018, 08:40:17 AM »
If it takes 36 years to save 20%, does that mean it'll take 180 years to pay in full? Can you even get a 150 year mortgage?

Well, you do have to account for the fact that while you're saving up to 20%, you're also still paying rent every month.  After you have the mortgage and move in, that rent payment can go toward the mortgage/taxes/etc.

The article is still terrible, of course.  And I noticed they got their numbers from the mortgage insurance company, someone with a vested interest in convincing people to buy with a lower downpayment...
« Last Edit: July 12, 2018, 08:41:56 AM by Raenia »

SteadyDoinIt

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Re: Saving for a 20% down payment on a home
« Reply #3 on: July 12, 2018, 11:14:21 AM »
We're buying a house at the moment are have decided on a 10% down payment even though we can afford 20%. Correct me if I'm wrong, but I believe there is a threshold where a down payment under 20% is the right play. See background and logic below.

1) House = $300k
2) Credit score for myself and wife is ~800
3) Debt:Income is superb. We owe nobody anything.
4) Fixed 30 yr Int Rate = 4.75% whether at 10% or 20%

So:

1) Loan at 10% = $270k. Principal/month is ~$340, interest/month is ~$1065, PMI is $45 for 8 years. Total = ~$1450.
2) Loan at 20% = $240k. Principal/month is ~305, interest/month is ~$950, no PMI for duration. Total = ~$1255

Therefore if my math is correct:

1) 20% dp = ~$200/month savings for 8 years @ anticipated return of 8% = $28k but no $30k to invest
2) 10% dp = $30k for 8 years @ anticipated return of 8% = ~$55k
3) Equity after 8 years is ~$4k different between a 10% and 20% dp

What am I missing? Or are we just at the right combination of home value, interest rate, and minimum time horizon?

FIRE for Gen Z

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Re: Saving for a 20% down payment on a home
« Reply #4 on: July 12, 2018, 11:40:31 AM »
The math checks out to me, though I'n no mathematician. With a low pmi and your assumed return in the stock market, it seems that the opportunity cost of a 20% down payment would be greater than the increased payment and pmi. $4,000 after 8 years isn't necessarily a huge margin, so I would be very interested to see if all of that works out. But there are certainly times where taking increased costs makes sense, if you have a much higher return elsewhere.

BigRed

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Re: Saving for a 20% down payment on a home
« Reply #5 on: July 12, 2018, 12:47:56 PM »
It seems unusual to me that the rate is the same for both 10% and 20%.  Generally that has not been the case when I've looked (and we're shopping right now for one).  Also, you have to invest the money, most people spend, or don't even have, the extra 10%, which makes the calculation a little different.




Dabnasty

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Re: Saving for a 20% down payment on a home
« Reply #6 on: July 12, 2018, 12:56:49 PM »
We're buying a house at the moment are have decided on a 10% down payment even though we can afford 20%. Correct me if I'm wrong, but I believe there is a threshold where a down payment under 20% is the right play. See background and logic below.

1) House = $300k
2) Credit score for myself and wife is ~800
3) Debt:Income is superb. We owe nobody anything.
4) Fixed 30 yr Int Rate = 4.75% whether at 10% or 20%

So:

1) Loan at 10% = $270k. Principal/month is ~$340, interest/month is ~$1065, PMI is $45 for 8 years. Total = ~$1450.
2) Loan at 20% = $240k. Principal/month is ~305, interest/month is ~$950, no PMI for duration. Total = ~$1255

Therefore if my math is correct:

1) 20% dp = ~$200/month savings for 8 years @ anticipated return of 8% = $28k but no $30k to invest
2) 10% dp = $30k for 8 years @ anticipated return of 8% = ~$55k
3) Equity after 8 years is ~$4k different between a 10% and 20% dp

What am I missing? Or are we just at the right combination of home value, interest rate, and minimum time horizon?

I think you're forgetting to add the +$30,000 equity to your 20% down equation. You would have ~$25,000 more in equity with the 20% down payment after 8 years.

Also, why did you choose 8 years? it might be simpler to look at the whole 30 years.

1) 20% dp = $200/month for 6.5* years + $155/month for 23.5 years @ anticipated return of 8% = ~256k
2) 10% dp = $30k for 30 years @ anticipated return of 8% = ~$302k

You could be +$46k 30 years from now by putting down 10%, but that assumes 8% returns and that you can get the same mortgage rate for either loan which seems unlikely. If market returns were 7% you'd be +18k and at 6% it would be a wash. And of course that assumes consistent returns for 30 years.

*If home value doesn't change you would hit 20% equity after 6.5 years. PMI could be gone sooner if your home appreciates or later if it depreciates.

ETA: I've never had a mortgage and am far from an expert. I just did this as a mental exercise for my own sake so I may have missed something too.
« Last Edit: July 12, 2018, 01:04:00 PM by Dabnasty »