Raising Money for a Down Payment on a Home
Posted by jefferson on Feb 25, 2013 in Making Money | 40 comments
In the past month, Michelle and I have ventured deeper and deeper into the world of buying and selling a home. There are so many different aspects that make up this process, and we hope to share some of what we are going through here on See Debt Run in the weeks and months to come. It is amazing how an experience can be so incredibly exciting, and so unbelievably stressful at the same time, but that is where we are.
Financing a Home Purchase
When it comes to financing a home purchase, one of the most critical parts is coming up with as much money as possible for your down payment. Obviously, in an ideal world, you would find a way to purchase a home with cash and to avoid a getting a mortgage altogether, but this only occurs with about 38% of home purchases (which is a higher number than I was expecting). For the rest of us, we will need to speak with a bank or credit union to arrange for financing.
The way that the mortgage industry is setup, borrowing gets a lot more complicated if you don’t have 20% of the purchase price to put down on the home. If you can’t come up with that amount, then you are stuck paying Private Mortgage Insurance (PMI) or trying to convince a bank somewhere to give you a Piggy Back loan, neither of which are especially appetizing options. But that is another post for another day. When it comes to down payments, the general rule is that the larger the amount of money that you can put down, the better off you will be.
Benefits of a Larger Down Payment
The benefits of finding extra money to put towards your down payment go above and beyond avoiding the fees involved with PMI. In addition, your mortgage payment itself will much lower if you have to borrow less money. This will free up a greater percentage of your budget for life’s other expenses, and keep you from becoming “house poor”.
Most lenders will also offer lower rates for those that are able to pay for a larger percentage of the house up front. There is considerably less risk on their end to give a loan on a home where the buyer has already paid for a significant percentage of the home’s value. If worse comes to worst and they (the lenders) are forced to forclose on the home, they can be confident that they will be able to sell the home without losing significant money.
Having a larger percentage of equity in your home also provides you, the homeowner, with security that you could sell your home if you need to. Home values can fluctuate wildly in the current market (just look at Zillow to chart out the home values over time), and the more equity that you have in your home, the more you are protected from these variations. Many folks have gotten into trouble in the last decade, effectively getting “trapped” in their homes, when they owed more than could possibly sell their homes for.
How to Raise the Extra Money
To get to that magical 20%, you may find yourself needing to scramble a bit. I certainly wouldn’t advocate doing anything to crazy in order to reach that amount. If you do end up needing to pay PMI for a period of time, it isn’t the end of the world. You can typically stop paying the PMI, once you reach that 20% loan to value number, so the extra hit on your budget won’t be permanent.
Many times, the majority of your down payment will come from the sale of your existing home. How much you will make from the sale of a home depends on your local housing market, and how long you have lived in the home. Keep in mind that the actual amount you will have available for use post-closing is not as simple your remaining mortgage amount subtracted from the sale price. You will also need to factor in real estate agent commission, closing costs, taxes, and more. When all is said and done, the amount that you receive from the sale of your home may not be enough to get your down payment to the desired level.
To help beef up your down payment even further, one good option is to time your home purchase to happen when you are expecting to get a bonus at work. Also, if you are expecting a cash injection from a structured settlement or from an inheritance, a home purchase remains one of the best investments that you can make with this extra money. As a last resort, you could potentially reach out to family members to see if they would be willing to give you an interest-free loan to help cover the gap.
Taking the Last Step
One final recommendation when it comes to financing a new home purchase would be to not be afraid to shop around. If you get an estimate from a lender, factor in the total cost of the loan, including closing costs and interest rates. You are protected by law from multiple inquiries into your credit in the time in and around a new home purchase, do don’t be afraid to get estimates from multiple lenders. Good luck!
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We plan on putting as large of a down payment on our next house as we can. No PMI this time
A good plan, Michelle.. PMI is the very definition of money for nothing!
Our next, and likely forever, home will have at least 20% down. We’ve decided to stay in this home as long as possible to make that possible between equity and savings. We’re also not moving until we have our non-mortgage debt paid off…long story short, we’re not going anywhere anytime soon!
Catherine recently posted..Our Budget Friendly Wedding
Our debt will be paid off before we move as well.. We wouldn’t have it any other way!
Buying anything that costs a great deal is nerve wracking but you are right, like you would shop around for just the right home you can make a commit to, you should shop around for a mortgage rate you feel comfortable with. And if in the future the economy changes and rates drop, you aren’t stuck with your lender. You can always refinance your mortgage and possibly save money in the end–if the damage of interest hasn’t done too much already.
Mary@Financial Helper Newsletter recently posted..Alternatives to Foreclosure and Pros and Cons
Yep… We have never been one to shy away from refinancing if a better rate is available.. One of the reasons why we are considering moving now is because rates are so low.. They are only going to go up from here, which will in turn make houses more expensive!
I was surprised to see that 38% of homes were purchased in cash, like you. Wow. Good for us! Home buying is such an exciting time, but there are so many things to balance and understand. Shopping around is definitely a smart idea too.
Shannon @ The Heavy Purse recently posted..Children and Money: Don’t Turn It into a Taboo Topic, Part II
Me too!.. I think that perhaps older folks buying homes in Florida and what-not with cash must tip the scales a bit.
I totally agree to avoid paying PMI at all costs. It is such a waste of money!
Holly@ClubThrifty recently posted..Types of Investments: Slicing Through The Mystique
Indeed it is Holly.. I think Piggyback loans are a much better option… but they are getting hard to find.
Piggyback loans are still available through reputable nonprofit housing agencies for buyers with modest incomes. Some are forgiven, some are deferred, and some are at reduced interest rates.
Unfortunately, far fewer people eligible for this help apply for it.
Pamela | Hands on Home Buyer recently posted..Buying a House is Like Designing a Website
I don’t think we would qualify for any of those scenarios, unfortunately..
Wow, 38% does seem like a high number of people who pay cash for the downpayment on a house. Good advice to try and schedule a downpayment around a time where you get an added bonus or extra income in sight.
Kelly@Financial-Lessons recently posted..Financial Benefits of Being a Vegetarian
That is our plan right now.. I am expecting a bonus at work here in a few weeks, which will finish off our debt once and for all and give us a nice start on our new home going forward.
This is what I am working on now. We won’t make much, if anything, from the sale of our current home, so we have to save the down payment. Nothing exciting for sure. Hopefully with a little time, we can get more equity.
Grayson @ Debt Roundup recently posted..Budget Fail: Unrealistic Expectations While Shopping
A lot of people are in that boat (where they wont make anything from the sale of their home), and it is a bit scary. I have seen houses that were bought just a few years ago that are being sold now for HUNDREDS OF THOUSANDS of dollars less than they bought them for.. Frightening.
My husband and I just recently bought a home, and because this was our second house, we had more money saved up for a down payment. I think we got a little bit too excited, though, and put more down than we should have for our down payment. We left ourselves with a little less wiggle room than we would have liked. If I could do it over again, I would have put about $10,000 less down and kept more for fixing up the house, etc.
That is a really good point, Pam, and is part of our current plans. We are absolutely going to set a little bit aside to cover some home improvements in the new home. No home is perfect in every way
We’re hoping to buy an investment property in the next year or two. Because properties in the area we’re looking into are so much cheaper then in our state we’ll definitely be avoiding PMI and putting down at least 20%, hopefully more.
KK @ Student Debt Survivor recently posted..Sex & The City on a Budget
Good plan. If you are going to start investing in real estate, having enough money to put down 20% on each purchase is an essential first step.
Just get rid of the PMI and you’ll discover that your life is a lot better than it is used to be.
Marnie Byod recently posted..Brisbane Home Sellers – Now is the time to Renovate to Sell
indeed, it can free up hundreds of dollars each month (depending on the purchase price of your home, of course)
That 38% is a bit surprising, but a good surprise! When and if we buy a new house we plan on putting down at least 20% as we did not do that with our current house and are still kicking ourselves.
John S @ Frugal Rules recently posted..5 Investing Mistakes That Are Easy to Make
38% seems like a large number. I didn’t realize that many people bought their home with cash. Good for them. We will be paying 20% down to avoid PMI but not more than that. I do not mind having a mortgage, esp. if it is a rental house. The interest rates are low and it is inflation protected. So I prefer to pay it off slowly and invest the rest in other more ROI venues.
Suba recently posted..How much house can I afford? You got to be kidding me!
I’m with John. We’re still paying off the PMI on our mortgage and wish that money could be used for something else. When we buy our next house I’d like at least a 40% down payment so that we have more equity in the house and lower payments.
Justin@TheFrugalPath recently posted..In Debt and Out of Ideas? Draw Your Purchases.
We put a decent chunk down on our home but we saved money over the years plus sold houses previous so it all adds up. If we didn’t we would have had to pay CMHC fees. I don’ think I would be interested in taking a portion of my RRSP to fund the downpayment but some do in Canada. I believe you have to be a first time home buyer for that. In the end you still owe yourself back the money so it’s just as big of a headache.
Canadianbudgetbinder recently posted..The Grocery Game Challenge #9 Feb 25-Mar 3,2013-No-Shop Week, No Means No!
I’m really hoping to buy a house in the next 18 – 24 months. I’m not sure I’ll have the 20% saved, but I’m hoping I’m close. If I do get slapped with PMI, I think I’d rather have a piggy back loan and pay that baby off sooner. Sunny CA comes with a big price tag.
Little House recently posted..Mortgage Life Insurance Explained
Since piggy back loans are at a much higher interest rate than your first mortgage, you might find PMI is the better bargain. Do the math before you make a decision.
And California has lots of help for first home buyers, Check to see if you’re eligible for a program through a local nonprofit.
Pamela | Hands on Home Buyer recently posted..Buying a House is Like Designing a Website
Our first plan was a 5% down payment on a small starter house in the $100k-$120k range that would have resulted in payments in our budget. Unfortunately, we weren’t able to get financing at that level and wound up buying a mobile home for a fraction of the cost of the house and our down payment wound up being 25%
Edward Antrobus recently posted..The Parable of the Paint Can: The McDonald’s Hot Coffee Case as a Divining Rod for Political Leanings
I just bought a home with 20% down. My current home was the fifth property I made an offer on, I was unsuccessful because I was competing with investors who made cash offers! Prices are rising and investors are starting to leave Phoenix for other undervalued markets. Glad to see them go!
Paul @ The Frugal Toad recently posted..Budgeting Tips: How to Stop Spending Money on Things You Don’t Need
Getting the seller to pay closing costs can also help you put more money towards a down payment. I am curious what lenders give better rates based on how big of a down payment you are making, though, since our lender gives the lowest allowed rate regardless of whether you are putting the absolute minimum down or a large down payment.
DC @ Young Adult Money recently posted..Peanuts, Crackers, or Cookies?
My husband and I heard on the car radio the other day that at some point this year PMI is changing and that it will be on the loan for the life of the loan, you will not be able to take it off when you get the 22 percent paid down. I have looked online and cannot find anything about this, but one random comment on a blog, so it is something worth checking into. 20 percent is a lot to come up with, but it seems like if PMI is going up a bit in price, which they said also, and stays on the loan, it might be worth trying to do !! Maybe you will have better luck finding out more, but I am sure any mortgage company can answer that as well !! We are planning to buy a house in the near future too, not sure if we can save 20 percent down and buy a house in less than five years, that is a lot.
Now I have also heard that some credit unions do not charge PMI but they are usually shorter loans, 10 , 15 and 20 years, so that is an option too !!I am fairly certain our credit union does not charge PMI, so I think that is probably what we will have to do. A shorter term may mean spending a bit less on a house, but that can be a good thing too !!
I like your advice, Jefferson, to compare all costs on a loan. I’ve sat in on a ton of these deals and I’ve seen so many “mistake” switches that occurred at closing there’s NO WAY they were all mistakes. Ask for the fees in writing before you sign on the dotted line so that you can compare all the costs. As one trusted mortgage broker friend said, in many cases the interest rate is just “everyone’s best lie” about what the costs really are on a loan.
AverageJoe recently posted..How To Increase Your Yield Through Microloans
20% sounds like the magic number, huh. Anything more is just frosting on the cake.
38% sounds so huge. I would have guessed 10%!
Cassi recently posted..How Did I Get Here?
We were lucky to have gotten a decent profit from the sale of our first home to put down on the one we have now. I hope we don’t have to move for a long time, but I think it is fun to look at real estate. It will be exciting to follow your search.
Kim@Eyesonthedollar recently posted..What Do I Miss From My Days of Spending Too Much Money?
Totally agree about putting down as much as you can. The less time you have to live with a mortgage payment, the better! Great post!
Laurie @ The Frugal Farmer recently posted..February 2013 Recap
I admire you for having the courage to post your life online for the world to see. I may not really know you but I like reading your posts and knowing that things are getting better for you. All the best
Rynessa@financialfreedomnewsletter.net recently posted..Mortgage Refinance Tips for 2013
While your advice is very sound readers need to be cautious. I have seen situations where people have put this type of money down and the value of their home goes down tremendously in value for whate4ver reason. In one example it was new townhouses. In this situation many of the owners have lost their homes to foreclosure. Think about who ended up worse off; the person who put up a large down-payment and one who put up a little down-payment. You guessed it; the former. So the advice given would have worked adversely in this situation. So buying in today’s uncertain market must be done carefully and all risks need to wieghed.
STEVEN J. FROMM, ATTORNEY, LL.M. (TAXATION) recently posted..Estate Planning 2013: Now What? A Must Read For Everyone
Buying and selling a home may seem like an overwhelming process but it seems as though you have a positive outlook by sharing your experience! There are ways in which you can help save for big expenses like buying a home. Thanks for the great insight!
Cami@financialbailoutnews recently posted..Tips for Saving for Big Expenses
I am also saving for a home and I am almost there in my down payment. Just a bit more because I do want to give a bigger down payment.
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