Nick, & Cindy Davis

Down-payment shouldn’t destroy budget

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Maximizing a home down-payment tends to make sense: The larger the down payment, the cheaper the monthly mortgage bill and the better the possibility of building equity quicker.

 

Home down-payment shouldn’t destroy buyers’ budget

Home down-payment shouldn’t destroy buyers’ budget

 

But putting an excessive amount down could render you without enough cash for home maintenance – or anything else.

Pinpointing the correct amount involves balancing the benefits of boosting the down payment against the need to hold back money for urgent upgrades, life’s emergencies, and having some fun with your new home.

“There’s really no one-size-fits-all solution,” says Jason Speciner, a certified financial planner in Fort Collins, Colorado.

The result of higher down payment

Calculating how different down payments would affect a monthly mortgage payment is eye-opening. Some lenders require only 3% down for conventional home loans, helping to make getting in the door easier but means assuming more debt in comparison to higher down payments.

Many borrowers inquire if they should scrape together a tad bit more, such as 5% versus 3%, says Rick Bechtel, head of U.S. residential lending at TD Bank. However that probably wouldn’t make enough difference in the monthly mortgage payment to warrant doing so if it left you strapped, he states.

“The need for post-closing cash is always greater, and sometimes significantly so, than people expect,” he says.

However a higher down payment can make a significant difference if it means lowering or avoiding mortgage insurance. The insurance, which will involve upfront and fees each month, protects the lender if the borrower defaults. Depending on the type of mortgage, making a higher down payment may eliminate a part of that expense, if not all of it.

Kristin Phillips, a Tampa, Florida, psychologist and author of The Debt Shrink blog, says she and her husband, Brandon, couldn’t put down the traditional 20%, however they planned to put down more than the minimum when they bought a home in 2013.

“Ten percent was a good compromise,” she says. That kept the monthly mortgage under 25 percent of their income so they could live comfortably. Eventually they made extra mortgage payments to build enough equity to eliminate private mortgage insurance.

Borrow carefully

When making the decision of down payment size, consider its effect on other areas of your financial plan.

Twenty-nine percent of homeowners ages 21 to 34 borrowed from retirement accounts to assist you to fund down payments, as reported by the Bank of the West’s 2018 Millennial Study.

However the decision to do so must not be taken lightly. Borrowing from a 401(k) is extremely risky. Following a job loss, the loan has to be repaid by the next tax filing deadline or it’s taxed as standard income, with a 10% penalty if the withdrawal is taken before age 59½.

Using a Roth IRA to increase a down payment is a better option, says Aaron Clarke, a certified financial planner and wealth adviser at Halpern Financial in Ashburn, Virginia. There aren’t any taxes or penalties on withdrawals of contributions. First-time home buyers who have contributed to a Roth for a minimum of five years can withdraw as much as $10,000 of earnings on the contributions, tax- and penalty-free.

But Linda Rogers, a certified financial planner and owner of Planning Within Reach in Memphis, Tennessee, says she doesn’t recommend borrowing from retirement savings. Most people are behind on saving anyway, she says, and borrowing from an IRA means losing tax-free growth.

Expect the unexpected

Thirty-four percent of recent first-time buyers say they no longer felt financially secure after purchasing their current home, as reported by NerdWallet’s 2019 Home Buyer Report, based in part on a survey of 2,029 adults by The Harris Poll for NerdWallet.

To maintain security, resist draining your savings for the down payment and closing costs. Leave some for emergencies, like a car breakdown.

“Emergency reserves are for ‘Oh, shoot’ moments,” Speciner says.

And home-ownership includes an abundance of those. To reduce surprises, look at the home inspector’s report and negotiate repairs with the seller before purchasing. Budget for immediate upgrades, such as fencing the yard for your dog. Include some cushion.

Alexandra Geneser, a neuropsychologist, used a part of her savings for a 7% down payment and reserved the remaining to remodel a fixer-upper in Charlottesville, Virginia, in 2018. The money for upgrades included a 20% cushion in the event the project cost more than expected. The approach left her with plenty to create the home she wanted without derailing her financially. “I am so overjoyed with my house,” she says.

Finally, leave some funds for fun stuff, like furniture.

“You just achieved a dream,” Bechtel says. “You’re going to spend money because you’ll have rooms you didn’t have before.”

Ready to get started and find your new home? Nick, Cindy & Nicholas Davis with RE/MAX Premier Group are here to assist you with all your Real Estate Needs. We are always available at 813-300-7116 to answer your questions or you can simply click here and we will be in touch with you shortly.

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