There are two schools of thought when it comes to buying your first home:
1. Wait until you save up enough money for a large downpayment and closing costs. This way you get a lower monthly mortgage payment.
2. Don’t wait: buy your home today, enjoy the personal and financial benefits of homeownership now. Finance as much of the price of the home as the bank will lend you: use very little of your own money.
You might be surprised to hear that I subscribe to the first concept. I believe it’s a fantastic idea to save up the money, and get the lowest monthly payment. Who wants a large monthly mortgage payment? The choice of course is that your struggle is in the years it takes to save up the money. I definitely believe in that idea: you see a real benefit from your years of hard work, sacrifice and saving.
Here’s the problem with that line of thinking: we live in the NY Metro area, one of the highest cost-of-living areas in all the United States. Even if you were to live on the most absurdly frugal budget, work three jobs seven days a week, and absolutely bank every penny of your money, it could really be a long while before you save up the considerable monies needed for a “large” downpayment and the closing costs for your home purchase.
Start with the closing costs: New York State has among the highest closing costs in the nation. On average, 6% of the purchase price is money allocated JUST to closing costs. That money does nothing to lower your monthly mortgage payment.
Now to the “large” downpayment: because rates are so low, if you are like most of my clients and you want to see a substantial reduction in your monthly mortgage expense (let’s say, oh, $600 or so) then you’re going to need a LOT of money down. In dollars and cents that means, if my proposed mortgage payment is $3100 a month and I want to pay no more than $2500 a month, I’ll need a whopping $94,900 towards the downpayment! Holy cow!
Even if you could work three jobs, seven days, live super-frugal, and bank every penny, the average family would still need to wait 4 years or more to save up that kind of money (assuming you could put away $30,000 a year).
So, while I love the first concept of waiting/saving, I live in the real world. It’s the rare individual or family that can come up with that kind of strict lifestyle to save such money. That’s why I’ve always specialized in low down payment (and now NO downpayment) mortgages. Because in the real world of the NY Metro area, we just can’t get that kind of a leg up on housing. Prices go up, interest rates change, etc, etc.
Financing the whole shebang (purchase price and some of the closing costs) seems like a crazy idea when you see the numbers (monthly payment), but realistically it works to your benefit.
The mortgage interest is tax deductible. Your take home pay actually increases because you own a home! You don’t have to live a no-frills lifestyle sacrificing for something that seems so far away and unattainable. You can have your home, improve your life both with the real financial benefits and the intangible benefits (pride of ownership, financial awareness) that come with homeownership.
It’s not complicated, it’s just the way it is.