Home Down Payment Savings Goal Calculator

Saving up for a Down Payment on Your Home

Are you thinking about purchasing your first or second home? If it's your first home, this is an exciting and terrifying time. You want to get the best mortgage rate possible, and you're not sure about the different programs out there. There are several loan programs for first time home buyers, veteran's affairs loans, and government programs that help people get into their dream homes. This article will go over those options; we will also list the average home amount around the United States and some of the factors that go into the pricing. We'll also talk about down payments and why it's a good idea to have at least 20% saved.

What are the Average Home Costs by Region, and What Makes Them Fluctuate?

Depending on where you want to settle in and buy you home, you could be paying a much higher price.

1. Employment. The number of people who have a steady job and can afford a mortgage has a large effect on housing prices. When the time comes that it's less expensive to get a mortgage and interest rates are low, more people become eligible. This increases the number of homebuyers in the market, and this can drive home prices up.
2. Housing Bust. In 2006, the housing market started a downward slide. People lost their jobs and their ability to afford their mortgage payments. Once the default rate skyrocketed, lenders began suffering huge losses, and they reached out to mortgage lenders for assistance. They tightened the credit restrictions further, and this made the home buyer numbers plummet. This caused the bottom to fall out of real estate prices, and they went to extreme lows. However, since they tightened credit restrictions, these homes sat empty because there were no eligible buyers.
3. Interest Rate. Inflation also plays a role in housing prices rising and falling. In places where there is high inflation, house prices tend to go up. However, the housing markets tend to fall if the inflation in the area is higher. When interest rates and inflation goes up, the housing prices fall; however if the interest rates and inflation drop, interest in buying increases.
4. Location. One of the biggest factors that go into a home's price is its location. Location, location, location is also known as the prime three rules of real estate. Typically, the closer the homes are to a downtown area in a city, the more expensive they are. As they start moving away, the prices begin to decline. This is because homes that are closer to the downtown are in more demand, so it drives the prices up.
5. Supply and Demand. If you want to buy a home in a more trendy neighborhood, there may only be a limited amount to purchase, and you're competing with other buying. If the people or agency that is selling the house know this, they'll list the house accordingly. From a sellers perspective, there are usually more buyers interested than not, so they can set the price.

The Average Housing Costs by Region

source: Census.gov

What is the Typical Down Payment Amount and Why?

If you're planning on purchasing a home, almost every lender will require some down payment unless you're using a particular loan option. There is a range that most lenders will expect you to have, and it can change depending on your credit score, income level, and your chosen lending program. Your banks use either your Vantage score or a FICO score to determine your down payment amount. It is a good idea to ask your lender of choice which one they use so you know what one you should look at.

The Average Price

The average amount you can expect to put down on your home is 20% of your home's total value. Also, the Home Buying Institute has a down payment estimate range from 0% to 20%. If you're trying to avoid having to use more expensive private mortgage insurance, you may want a down payment amount of more than 20%. This ensures that your chosen lender is protected if you default on the mortgage and stop making payments. It also varies by location. For example, if you're looking at a million dollar home, your down payment could be $200,000 or more, and this price could buy you an entire house in another part of the country.

When You Can End up Paying More

If you have a lower credit score or a poor payment history, the mortgage lender might ask for a higher down payment amount. You want to aim for a credit score of 680 or higher because this is where you'll start getting offered a lower amount for your down payment. If you have a score from 620 to 679, you're considered to have fair credit. Anything below that is considered high-risk by lenders. However, if you're willing and able to pay more up front, your mortgage lender may offer you lower interest rates or shorter loan terms.

When You Can End up Paying Less

If you have great credit, your lender will usually ask for a lower down payment amount because you have a history of being financially responsible and making your payments on time. You might also get a lower rate if you agree to have and pay mortgage insurance on your home. This insurance helps to protect your lender in case you stop making payments or you default. However, mortgage insurance increases your monthly mortgage payment. Many lenders will remove this mortgage insurance after you pay off 20% of your balance.

FICO and Vantage Credit Scores

What Goes into Deciding Your Vantage or FICO Score?

What Advantages do People Get by Putting 20% Down?

If you're prepared to put 20% down as your down payment, you can get several advantages.

• Equity Building. If you put a significant down payment down or 20%, it instantly builds the equity level in your home. This will act as a safeguard if the home buying market begins to fall.
• Improves Your Chances. If you have 20% to put down on your mortgage, lenders are more likely to work with you and give you the funding. It lowers your risk of not paying them back. Doing this also shows them that you're serious and you are willing to work for your home and to have the payments that you need.
• Lower Interest Rate. If you pay less than 20% for a down payment, you will pay more in interest over the life of your loans. By paying the 20% down payment amount, you lender will lower your overall interest rate. This could potentially save you thousands over the life of your mortgage.
• No Private Mortgage Insurance. If you put 20% down, you'll avoid having to have private mortgage insurance added on to your monthly payment. This is extra insurance that is designed to protect your mortgage lender, and they add a percentage that acts as a private insurance policy for the lender. This will drive your payment up.
• Recent Regulation Change. The Consumer Financial Protection Bureau just changed their regulations regarding mortgages. Prospective home buyers now have to have a 43% debt-to-income ratio to qualify for a mortgage. This means that you have to add up your mortgage payments, property taxes, credit card debt, and car or student loan payments. This total has to be less than $43 out of every $100 in income you earn each month. By putting 20% down, you decrease your mortgage payment and decrease your debt-to-income ratio.
• Smaller Payments. If you put 20% down, you will have less of a balance on your mortgage. This will make your mortgage payment amount less each month, and you will have an easier time affording it.

What Loan Programs Let People Have a Lower Down Payment?

If you can't afford a 20% down payment but you are still interested in purchasing a home. There are several programs available that you can apply for, and they will help you get into your home.

FHA Loan

An FHA loan is a loan through the Federal Housing Administration. The loan will require a smaller down payment and smaller closing costs than other traditional loans. The down payment is around 3.5% of the purchase cost, and mortgage insurance is included in the monthly mortgage payment. This loan will allow a family member, charity, or grant to cover to give a financial gift that can cover 100% of the 3.5% down payment amount.

First-Time Homebuyers

Some programs cater to first-time homebuyers that allow them to pay no or a very low down payment on their mortgage. Some of these programs are offered by an individual bank or lender, and there are several of them that are offered through the government. The HomePath Ready Buyer program will give first-time homebuyers up to 3.1% of the total home's value to put toward the closing costs. All you have to do to get this 3.1% just for completing a homebuyer education course.

Good Neighbor Next Door

This program is focused on giving housing opportunities for emergency medical technicians, firefighters, law enforcement, and teachers. You have to commit to living in the home for at least 36 months to be eligible for this program. If you do this, you could receive up to 50% off the listing price of the home. The homes that are for sale in this program were initially backed by the FHA and foreclosed on. The houses in the Good Neighbor Next Door program are located in traditionally low-income areas with a high number of FHA-backed homes that have been foreclosed on.

National Homebuyers Fund

The National Homebuyers Fund (NHF) is a non-profit public assistance benefit program. This program was established in 2002, and they have helped over 34,500 people finance and buy a home by providing various down payment assistance options. They offer their support in the form of a grant, and this grant is supposed to cover down payments and closing costs up to 5% of the home's value. This grant is available to any home buyer, and there are no qualifications like being a first-time homebuyer to be eligible.

USDA Loan

Another loan option with no down payment is a loan through the United States Department of Agriculture (USDA). This option works by the USDA guaranteeing a mortgage that is issued through a local lender. Once they do this, it will lower the interest rates and make the down payment amount drop to zero. However, a downside to this program is that if you choose or can't put any money down, you will have to pay mortgage insurance along with your mortgage payment. They make it easy for every income level to maintain a mortgage, and they offer direct loans for low and very low-income families with down payment amounts as low as 1% of the home's purchase price. The USDA program will also give out grants and loans for home improvements and any renovations.

Veterans Affairs Loans

A Veterans Affairs (VA) Loan is a loan that is provided to Service Members, Veterans, and eligible military surviving spouses. The Department of Veteran's Affairs will guarantee a part of this loan, and that part will help you buy, build, renovate, or adapt your home to suit your needs. It will also help you keep your home if you fall behind on traditional mortgage payments. You will be able to get better loan terms and interest rates through you lender of choice because a part of the loan is guaranteed by the VA.

When Does it Make Sense to Rent Versus Buy a Home?

If you're not sure if you should rent or buy your home, there are several things you'll have to keep in mind before you begin this process.

• Job Stability. If you work in a job where you don't have a stable paycheck, it might make more sense for you to rent your home. Things like real estate workers who survive on commission, business owners who rely on summer tourism, or self-employed people may have irregular income which makes it harder to obtain funding. You want to make sure you can make your payments no matter what happens, and you may want to wait until you get a regular paycheck year round.
• Length of Residence. If you're planning on buying a home, plan to live in it for at least five years. The last thing you want to do is purchase a home and then get a great job offer two hours away and commute. You want to have time to invest in your home before you move. If you can't commit to five years, perhaps renting would be better until you're sure. If you buy a home using a 30-year mortgage most of the payments for the first decade apply toward interest rather than principal.
• Purchase Price vs Rental Price. If you're paying around the same amount of rent that you would pay for a mortgage, you might want to look into buying. This way, you're securing an investment, and you have more flexibility to renovate your home as you wish.

What Parts of the Country Does it Make More Sense to Rent?

After the great recession real estate prices plunged, which meant that in the 100 largest metro areas in the country, it made more sense to purchase a house rather than rent one. At the bottom of the market, in many markets buying a home was over 35% cheaper than renting, inclusive of the costs that are associated with purchasing a home.

• Midwest. The average cost of a house in the Midwest is cheaper than the cost of other regions in the country. It makes more sense to buy a home in this region for this reason. The market is also most solid here and left prone to large fluctuations. Be aware of associated trends which may change the cost dynamics.
• Northeast. The Northeast sees a lot of the younger generation leaving for places like Texas and areas in the South, so it makes sense to buy in this area. There are many jobs available, and more are opening each year as the population leaves.
• South. The South sees a rise in housing prices because of an influx of younger people. It makes more sense to rent in this area unless you live some distance away from the metro areas.
• West. If you have a stable job and don't plan to move anytime soon, buying is a better option in the Western region. The housing prices here are more expensive, but you'll pay almost the same when you buy or when you're renting.

The above sections represent a "broad strokes" view. Each house, neighborhood, city and state has unique conditions. Here are some examples:

• Illinois. As Illinois raises state income taxes & Chicago property taxes jump to make up for under-funded pensions, that may lower what other people are willing to pay for a house since owning it will also mean paying a higher property tax.
• San Francisco Bay Area. While Prop 13 makes home ownership affordable for people who have owned their homes for many decades, the boom caused by technology companies has caused an affordability crisis which forced many other workers to live far away from work, making a real estate purchase less appealing.
• Foreign Hot Money. During bubbles real estate prices increase faster than rents do, particularly if the local market is appealing to foreign hot money. Within a given country cities of similar size may have vastly different local dynamics. If you go back a decade Montreal was seen as a top market in Canada, but local real estate prices have not moved much in Montreal. Vancouver has seen a much sharper increase in real estate prices, as over 50,000 millionaires from China moved into the city. Toronto was also in a real estate bubble.

In spite of nearly a decade passing since the great recession, home ownership rates in the United States are at a 5 decade low. Rising healthcare costs, increased student loan debt & memories of the losses from the great recession have made individuals cautious while private equity investors like Blackstone purchased billions in property.

BiggerPockets publishes an annual report of the best & worst markets for residential real estate investing.

What are Some of the Hidden Costs of Buying a Home?

If you plan to buy a home, being organized is a major key to your success. There are several costs you have to take into account so you're sure you can afford everything once you buy your home.

• Down Payment. Your down payment is a set percent of your potential home's listed price that you have to pay upfront. This percentage can fluctuate from 3.5% up to 20% or more based on your mortgage loan type, current market, and your credit score.
• Home Appraisal. An appraisal is done by an agent from your lender's company to make sure the home's listed price matches the home's actual value. This price ranges anywhere from $300 to $500, and every home has to have one done.
• Home Inspection. An inspection will have to be done by a licensed home inspector, and this is a mandatory step. The inspector will be looking for any potential problems that the potential home buyer could have missed on their walk through like a cracked foundation, structural issues, or leaks in the roof. This can cost anywhere from $300 to $500 per inspection.
• Insurance and Loan Payments. You'll pay loan payments and insurance each month on your new home. The Homeowners and Renters Insurance Institute estimated that this amount could be around $1,034 for insurance alone per year.
• Maintenance. As a homeowner, you will be responsible for all of the maintenance, renovations, and general upkeep around your house once you purchase it. Depending on the quality of the home when you move in, this could be expensive.
• Property Taxes. Once you purchase the house, you could end up being responsible for up to six months of property taxes before moving in, but this amount will depend on your location and the time of year the purchase is completed in.

How Long Does it Take to Buy or Sell a Home and What are the Costs?

If you're trying to buy or sell a home; this process can take anywhere from a few months to a few years depending on the market, your listing price, and how much you're willing to negotiate.

Buying a Home

If you're starting to make your closing contract, it can take one to two months from start to finish. After this, there can be an additional one to two months for paperwork depending on your loan type. Also, if you start your contract in the middle of a month, your agent may wait until the first of the next month to finish the process. You will also have to include how long it takes you to find a home that you like and that suits your needs. So, this process could take anywhere from two months to a year.

Selling a Home

If you're selling your home, research has shown that it can take between 36 to 70 days after the home is listed to sell. To get a more accurate estimate, you should contact a licensed real estate agent that knows the market where you home is located. Your home's condition will also play a big role on how long it sits on the market before it sells. To make your home sell quicker, stage it before you have potential buyers come through and take steps to fix up any minor issues.

Costs

Home sellers have a number of costs they have to manage in order to sell their home.

• Closing Costs. You may be asked to pay closing costs on your home. These could include HOA fees, attorney fees, and an escrow fee to name a few.
• Commisson Fee. The real estate agent will get a commission fee, and this can be as high as 5% or 6% of your home's selling price.
• Inspection. There are also the home and inspection costs to add in. This could add up to extra hundreds of dollars.
• Staging. You want to give buyers a realistic expectation about what the home will look like with furniture. You might have to pay a professional stager to bring furniture in and arrange it.
• Utilities. You'll want to pay your utilities on your home until it sells. This can run you a few hundred additional dollars as well.
• Rent or Mortgage. Home sellers need to live somewhere while their home is up for sale. This can mean temporarily paying rent elsewhere, staying in a hotel, or paying 2 separate mortgage payments at the same time.

How Does Real Estate Gains Compare Against Long-Term Inflation or Stock Options?

Over the longterm real estate price tend to fluctuate in-line with broader inflation. Periodically real estate prices may overshoot or undershoot, but given a long enough timeframe they typically track broader inflation.Real estate investing for an individual homeowner is more about stability rather than achieving strong returns.

If you're trying to decide to invest in real estate versus stocks to achieve investment returns, stocks are usually the better choice. They are much more liquid, and they can be used in more flexible ways than traditional real estate. Also, you will be able to sell your stocks quickly in you need to without paying a lot in extra fees. Stocks also tend to have an upward trend, even if they drop sharply in bear markets. This general trend makes them a better option for those who are willing to let their money compound for years before buying a home. Companies like Vanguard make it easy to invest in a diversified portfolio cheaply to further reduce risk.

A homeowner with a 20% downpayment has a 5:1 leverage in buying the home & if things head south they have no way to exit a portion of their investment without exiting the entire investment. If a person is laid off they may not be able to refinance their loan or get a home equity loan. And if the real estate market softens banks may be less willing to lend against the property.

"Here is a harsh truth about homeownership: Over the long haul, it’s hard for homes to compete with the stock market in real appreciation. That’s because companies whose shares are traded on a stock exchange retain a good share of their earnings to plow back into the business. The business should grow and its real stock price should also grow through time — unless the company makes poor decisions, as some certainly do." - Robert Shiller

Table sources

• Residential price appreciation. 1963-2010, average new house price, US Census
• REIT. 1975-2014, MarketWatch
• S&P 500. returns with dividends reinvested from 1970-2016
• Bonds. FRED data geometric average return of U.S. Treasury notes from 1967-2016
• Inflation. 1963-2016 stats from the BLS using their CPI calculator