Ep. 44 – How Much Should A First Time Home Buyer Put Down? Question Of The Week 

 February 26, 2021

HBH 44 | Down Payment Options

Time for another question of the week and this one is what lots of you have been asking. David Sidoni, the How to Buy a Home Guy, gets to the heart of the big money question – how much money does it take to get a down payment? Are you wondering if you need 20% down? Would you like to hear about 10%, 5%, 3.5% or even ZERO money down to make your first home purchase? It may go against the grain of what you have been taught about mortgages all this time, but the unique market attributes of the time we are in right now actually make lower down payment options feasible, if not preferable. All the answers, tips, tricks, and hacks are here in this jam-packed episode. Be warned, there may be some math ahead, but surely nothing you can’t handle.

How Much Should A First Time Home Buyer Put Down? Question Of The Week

What Are The Options For A Down Payment When You Are Buying Your First Home?

Everybody wants to know how much they should put down for a down payment on a house. Spoiler alert, there is no one answer for everyone since we all have different finances. Let’s learn what’s right for you. Plus, a super fun bonus content, math.

This question is so loaded and controversial, I’m going to do this episode out of order. I’m going to start things right in the middle, the part where I start to spit out all the knowledge and give you all the hard facts and the math. I’m going to start with the guts. It might not make any sense to you, but keep on reading. It’s going to be like a Tarantino movie, all out of order, but eventually you figure how all the pieces fit. Now that you know all the history and all the philosophical differences of opinion on how much you should put down on your house, let’s talk about a real-world example.

When 20% Down Doesn’t Work

I had a Zoom with some awesome podcast listeners from Boston. Let’s call them Mark and Mary. They were two great young adults, probably half my age and God bless them, they had $150,000 saved for down payment. I know that might not be you, but do the math, make $150,000, $15,000 and you can make the math work for you. We’re all at different places. They’ve been thinking about this for about a year. They got a prequalification with a lender in March of 2020. That’s when everything went to poop.
They got approved back then for 20% down for a $700,000 purchase. They hadn’t found the podcast yet, so they waited it out through COVID, which all of us did. They kept paying their $2,200 a month rent while they tried to save up even more. Their big goal was to put down as much as they could to keep that future monthly payment low. A lot of guys are reading now for that same thing, you should not put a lot down to have a low-down payment. That’s everyone’s reasoning for doing a large down payment to have a smaller monthly payment with the mortgage. As we know with the mortgage, the beautiful thing about it is unlike rent, that monthly payment is fixed for 30 years. The payment does not go up like your rent.
What a lot of people think is, “We’re going to save like crazy and get a big down payment so that we have a lower lifetime monthly payment.” Meanwhile, while they’re waiting during COVID, during all the time, they’re still paying $2,200 a month on their rent while they save money so that they can put a big down payment. While they’re doing that, no one expected it, but during COVID, the prices started going up. After eleven months, they spent over $24,000 in rent and that rent is gone forever. That $700,000 home they were looking at, it has gone up 10%. It’s now $770,000.
This double sucks because when they started looking for homes in 2021 with a realtor, not only had their prices gone up, but they started to get frustrated because they were finding what many buyers in early 2021 found out and what you guys are still finding out. If you’re reading this in the future, things are probably different. Anyway, in 2021, they got frustrated with the low supply of homes for sale and the insane demand. That demand creates beating wars for almost every home, making them even more expensive than what my Boston friends, Mark and Mary were looking for when they first started getting approved for their loan. I was super happy to be zooming with them and help them out and discuss the financial options.
It’s one of my favorite things to do as a realtor is do a buyer consultation and be a real financial consultant, to help them reach their goals so that you, as the first-time home buyer, can not only have all your questions answered, but you can see all the different options you can to afford the best home possible. It was nice. They told me they love the show. One of the things they liked about it was it got them looking at things in a monthly way, not just looking at the big price. We talked about that in Episode 43, looking at price versus looking at payment.

HBH 44 | Down Payment Options
Down Payment Options: Buyers in early 2021 are finding out that the low supply of homes for sale is creating bidding wars for almost every home, making them even more expensive.

The funny thing is when they were out there looking at the homes with a realtor, they didn’t discuss their financial options with a realtor. They told me that they took their 8 or 9-month-old loan approval to which they had never even discussed the monthly payments. They were thinking about price and the realtor took them out and started showing them homes at that price. Very quickly they got disappointed because when they started versus where they were now, $700,000 changed a little bit. I asked them, “Mark, Mary, what monthly payment are you shooting for?” They’re paying $2,200 a month and they said they could stretch to $3,500 or they’d go all the way up to $4,500 a month if it didn’t need any work. It’s got to be perfect.
At this point, they’ve got $150,000 to put down and pay for closing costs, $140,000 is 20% and $10,000 left over, that’s a little tight for closing costs, but we knew that they had a couple of things they could do to make that work. $140,000 down, you take that $700,000 purchase price and you reduce it by the $140,000 to 20% down. You get $560,000 loan. That’s going to cost you about $3,000 a month right now because we’ve got these incredible low-interest rates. The good news is I told them, “It’s only $3,000 a month.” You said, “You guys were good to go to $3,500, $4,500 if the place was great. Maybe we ought to see if we can get a higher loan, something like that.” They said, “Yeah, but David, we’ve barely got 20% down on the $700,000. We’ve only got $10,000 left in the closing costs and that could be tough. The big bummer is everything we’re seeing is $700,000 and most of them need work.”
I said, “We could rerun your loan approval with maybe a better lender or a different lender and maybe a better realtor at this point.” They weren’t super thrilled and that’s why they were talking to me. I said, “You guys ask different questions, talk to different people and see what you can get approved at maybe with 10% down.” At this point, Mark and Mary looked at me like I was wicked stupid. They said they wanted to put as much down as they could so they can have that low monthly payment. Not to mention the fact, if they went under 20%, they would have to pay PMI, Private Mortgage Insurance.
[bctt tweet=”How much should you put down for a first home purchase? It’s a loaded question and there is no one-size-fits-all answer for it.” via=”no”]
They have heard from everybody that that’s wicked hash, nobody likes PMI. We ran the numbers a few different ways. Here’s one thing that we found that was very interesting. We figured out, what if you could get approved at $700,000 with 10% down? Here’s the big math. 10% down on $700,000 is $70,000. They had $150,000. The difference in the mortgage, because you now have a larger loan, so you’re going to be paying an extra $70,000 worth of loan every month in your mortgage.
That equates to about $368 a month. It’s a big deal. If you’re paying $368 a month over a 30-year loan. Plus, don’t forget when you go below 20%, that’s an arbitrary number the banks came up with, that’s when you have to pay the private mortgage insurance. It’s insurance the bank wants to make sure. They feel like if you’re not invested 20% into it, they want you to insure the loan. I said, “The good thing is you’ve got good credit.” Your PMI is going to be on the lower side. It’s going to be $132 a month if you put 10% down. You can put 10% down instead of 20% down. Every month, you’re going to have those extra payments. It’s going to be $368 in extra mortgage and $132 in PMI.
That happened to be a total increase of exactly $500 a month. By putting 10% less down, you’re going to have to pay an extra $500 a month. In this equation, what else is different here? You now have $70,000 in the bank. You said that you could stretch to $3,500 or $4,500 a month if it was fixed up nice. In the 20% down scenario, you’re paying $3,000 a month and you’ve got nothing left in the bank. In this 10% scenario, you’re paying $3,500 a month still on the low end of where you want to stretch, way in your comfort zone and doing great. You’ve got $70,000 in the bank and you can use a portion of that to remodel the home.
We’ve even talked about the fact that, “I know we said $3,500, but maybe we do want to keep it at $3,000,” so then do this, put 10% down. You’re going to have a payment of $3,500, $500 of that is extra. We figured that out, but you’re going to have $70,000 savings that you are going to have that you can put in your bank account. That extra $500 a month, you can pay it directly out of that $70,000 if you want to. We did the math. That’s 140 months or 11.5 years. They could be paying that comfortable $3,000 a month, not fix up the place, but take the money out from that $70,000 in the bank for 11.5 years. That is one person’s formula.

No One-Size-Fits-All Solution

It’s time for question of the week. Welcome back to you repeat readers and a special welcome if you’re a brand-new reader, trying to figure out how much you put as a down payment when you’re buying your first home. The answer might get you pretty pumped up. You may discover that not renting anymore could be the smartest thing that you could do. If you’re new, go ahead, give it a read. If you dig it, subscribe. You’ll get all the episodes automatically sent directly to you in your device. I’m here to educate, inform, empower you, trying to help take all the mystery out of the daunting, intimidating, and sometimes demoralizing task of attempting to become an informed first-time home buyer.
This is my one-man mission to bring you real stories about how other confused first-time buyers were magically transformed into savvy, knowledgeable, great first-time home buyers basking in the warm glow of knowledge. This week’s question, how much should you put down? I’ve heard this question many times in several years. I’m glad I’m finally doing a show about it. This is a loaded question. It’s not one that anybody can answer with a blanket statement.
What amount is right for you for a down payment? That’s based on your entire big picture. I encourage you to be careful not to listen to anybody else out there talking to you and telling you what they did. There are many people with an opinion that what they did is the only smart way to buy a home, that their down payment choice, that they figured out and understood. That’s the only way to buy a home. They say anyone who doesn’t put X amount down when they buy a home is an idiot. I don’t believe that’s true.
Nobody buys the same when you’re buying a home. We’re all different. If you’re in a mall and you both have $20 in your pocket and the person that you’re with who has that big opinion, they figure out where they can get a great deal on socks. You guys both go with your $20 and you both get the deal. In the case of buying a home, you do not have the same things in your pocket as anybody else. Nobody knows what lint, gum and crap you got in your pocket and who knows maybe they have $20 in all their pants pockets.
For you, this is the only $20 that you have in the world. They happen to be in your pocket. Maybe they’ve got $100 in their back pocket and you’ve got a hole in yours and realize that your change has been spilling out and falling all throughout the mall, or maybe they have light empty other pockets. Your pockets are filled with student loans, credit card debt, and that stupid high lease that you have two years left on that fresh ride that you cruise around town in, and that you might end up living in that dope, cool car because you can’t handle the payments.
It’s a loaded question. You can’t get an answer from a generic statement. You can’t get what is right for you and your family’s long-term financial goals. If someone tries to put you all in the same pot, you can’t get it from a top three reasons list or a top five down payment mistakes that first-time buyers make. Remember, this is coming from the guy who occasionally will post lists like that, but I also make fun of them. I tell you that these lists, these things that tell you about the mistakes that you don’t know about is just the beginning.
Your next step is to take some time and consult with a pro and figure out the other 163 things that aren’t on the list that you don’t know anything about. Consult, that’s a big difference between doing a little research. Don’t try to text somebody for a quick answer because there isn’t one, consult with somebody. You can’t find out something this big from watching a TikTok video or a few YouTube tutorials. They don’t talk back to you. They don’t ask you the specific questions to you.

HBH 44 | Down Payment Options
Down Payment Options: A good, experienced unicorn Realtor is going to give you the best plan, but only after hearing your full story.

A good experienced unicorn realtor is going to discover you the best plan only after listening and hearing your full story, and that comes through a full buyer consultation. That happens before you ever stepped foot in a home. There are a lot of first-time buyer realtors that are excited to show you homes, but that’s all they do. We call them door openers. They’re inexperienced, desperate, praying to close 2 or 3 deals this year or even worse, they are the part-timers out there who do real estate as a side hustle because for whatever reason, they’re not committed to real estate. They think that it’s something they can do on the side.
They’re in it for a quick buck to make some quick cash. They’re one of those agents who decided to do this on the side because I love people and I love interior design. They might be nice. You might get along with them. You guys might click and maybe they’re a great person to go out and have margaritas with, but in the long run, how it can hurt you is that they don’t have the experience and they don’t see the full scope of this colossal financial decision.
Unfortunately, there are a lot of agents out there that can’t fully grasp the momentous purchase, what this means to you and your family. If you give them a call, they’re happy to jump on the call. They’re going to email you back or they’re going to get your internet inquiry when you punched your information in on some website. They’ll go meet you at the home that you found online and they’re going to meet you right there so they can wait for it, open the door. That’s pretty much all they do because they haven’t even checked out to see if this home is right for you or worse, is this home going to bankrupt you in a few years because they haven’t heard your full story?
Their goal is to get you excited about homes and then make a sale. Who’s not enticed by the idea, the concept of being a homeowner, not being a renter anymore. Everyone loves that. Once those folks hook you in, then they send you to a lender and they say, “That’s their job. Let them do all the hard math. Let them figure out the important things,” like figuring out a down payment. Be careful of someone out there who’s trying to ascertain if it’s possible for you to buy a home and then start showing you places, maybe you shouldn’t be buying a home at that price.
Many realtors don’t have the experience to grasp the concept of creative thinking with financing because they’re new or they’re part-timers. They pass it on to the lender and then sometimes the lenders will do a quick brief pre-qualification and off you go. What happens? You don’t like what you see. You’re not pre-qualified far enough. They go, “Time for you to save some money.” You go save money and I’ll see you in six months. It’s about the plan. I know if you’re out there and you finally went, “I’m going to find out about buying a house.” You start listening to the podcast. The first thing you think about is all the fun stuff you’re going to do, go out and go to open houses. Not anymore, not unless you’re dressed in bubble wrap.
I say it all the time to my buyers. It sucks. When we started, it isn’t sexy and I’m going to bomb you out. If you think we’re going to do a quick ten-minute call to a lender and give them a couple of numbers, and then we’re going to go look at homes so we can talk about design concepts and HGTV fun things, slow your roll, Captain Megadowner in the house. I’m going to talk to you about long-term life plans, adulting crap. That is how we answer the question, how much should I put down?
Maybe you’re thinking, “Sidoni, thanks for the compassionate warning. That’s nice. When are you going to answer the question in the question of the week episode, how much?” I am answering the question. The first answer to the question is there is no one size fits all to the question, how much should I put down for my down payment for my first house? I wish there was. Anyone telling you that everybody should do whatever, whether it’s put 3.5% down, 5%, 10%, 20%, 50%, whatever. If they said, “Everybody should do that.” Without getting the scope of each individual person’s complete situation, they’re not trying to help you do the best thing for you. They’re trying to capture you, my favorite word that all the real estate marketers use. Capture as many buyers as they can.
Bring them all in, give them all mediocre service, weed them out until they find the few ones that can give an immediate payday and ignore the rest. One of the main goals of this podcast is not selling a dream to you to get you to act. I’m not trying to get you guys to, “Run out, find a realtor and go right now.” It’s selling you the dream to get a plan. There’s not a lot of advice out there when it comes to helping you plan. The internet figured out, “If I do that, they’re not buying something soon and there’s no quick money in it for me. I’m here to tell you, “Do your research and find someone playing the long game.” The good news is once you find that unicorn, that Sherpa, that Yoda to guide you, then you’ll begin to be opening your eyes and see the reality of how this works.
Maybe a 20% down payment is exactly right for you. Maybe not, maybe a much lower down payment can get you into a home sooner and make this monumental purchase at the time that is best for you and for your family’s financial wellbeing. There it is. I said it, “Maybe you shouldn’t put 20% down.” I opened the door and let the skeptics, the critters, the haters, let all the arguments start. I know that’s where it begins. I can hear some of you folks out there right now. Maybe not you guys because you’re reading, but this is the stuff I hear when I tell people, “Maybe you don’t have to put 20% down.”

The Case For Lower Down Payments

These are some of the things I hear, “He’s trying to sell you something. He wants to put you to put less down so that you buy sooner and get him paid sooner. Don’t do that. That’s suicide. Didn’t you see all those foreclosures in 2008, 2011 from all the people who put a little money down? That’s what caused the housing bubble in the recession. Dave Ramsey always says put 20% down and then pay your house off in fifteen years. He’s a good guy.” Let me address your hypothetical yelling while you’re reading this.
[bctt tweet=”Timing of purchase is the key to all smart and financially fortuitous decisions when it comes to buying a home.” via=”no”]
Number one, I’m not trying to sell you anything. First of all, most of you know, I’m going to give you a unicorn realtor somewhere else in the country and they’re going to help you buy a home. They’re totally cool. All the unicorns are cool at going whatever pace and whatever financial structure is best for you and your family. If you are local and I do work with you, that’s what I’m going to do too. Whatever your pace, that’s what makes the most sense. As long as you’ve done a full financial consult, you know where you’re going.
Number two, you say a low down payment, that’s a ticket for a realtor to get paid sooner. I understand why you’re saying that. Unfortunately, that’s some of the things the industry’s done. I believe in timing the purchase, that’s the key to all your smart and financially fortuitous decisions when it comes to buying a home. Go back to episode 38, the 2021 forecast for housing. There’s a reason why I’m talking about all this stuff now based on the numbers and what we’re seeing, or episode 36, the economics of timing of purchase with the end of your lease. Sometimes it’s good. Sometimes it’s bad. In Episode 40, we also talked about the question of the week, should I buy now or should I wait? Spoiler alert, it depends on you and your situation. There’s no blanket answer. Your own situation, it might be good to get you closed in 30 days. It might be better to get you closed in 30 weeks. We don’t know until we check it out.
Number three, that foreclosures, the crash that happened in 2008, ‘09, ‘10, and ‘11, that was because people used low down payments and had no equity when the market tanked. The foreclosures happened because the banks were lending to anybody with a pulse. Those people who did buy a house, they watched it double in value in two years. They went sweet and they refinanced the home to the max. It means they took a loan out to the new value, doubled the value, and they took a bunch of it out as cash. They used their home like an ATM machine. ATM machine is repetitive. A is Automated Teller Machine. It’s an ATM.
These people refi to the max. They took the cash out of the house and then they used it to pay off other debt, their credit cards, robbing Peter to pay Paul. The point is they had massive credit card debt and never should have gotten the loan to buy the house in the first place. The banks gave them the loans when they shouldn’t have. That is not how it works now. They’ve changed all of that. You have to qualify for the loan before they offer you any approval. If you qualify for 20%, that means you can handle it. If you qualify for 3.5%, that means you can handle that too.
Number four, people talking about the low down payments causing the recession. The low down payments didn’t cause a recession. The banks loaning to anyone caused the artificially inflated market, which made them tons of money. That’s why they did it. The scary thing is a lot of these big Wall Street guys started betting against mortgage-backed security, knowing that the system will fail. Watch the movie, The Big Short, if you want to learn about what happened. It’s very digestible. It’s not a big money finance movie. It’s talking about boring stuff, but it’s directed by Will Ferrell’s partner who co-wrote Anchorman, Talladega Nights and the other guys. The film is palatable considering the subject matter boring bank stuff.
Number five, Dave Ramsey, for those of you don’t know who Dave Ramsey is, he’s a financial guru and his story is remarkable. He’s an incredible rags-to-riches guy, personal story. He’s an institution now. He’s doing incredible work. He’s selflessly dedicating his life to helping thousands and thousands of people get out of debt. He hates debt. I agree with a large part of what he says. Part of the reason why he’s trying to do these is he’s trying to change the culture because Americans suck at managing debt and saving money. We do. You can blame the credit card companies for preying on young adults, on college campuses, by offering everybody a free hacky sack or a Frisbee if you sign up for a credit card.
You can blame the schools, the elementary and junior high schools for making you do dumb stuff and not teaching you finance. My ten-year-old is doing freaking cursive. She’s doing cursive in 2021. I guarantee you by the time she gets out of fifth grade, she’s going to have no clue about any of this financial stuff, because she’s learning how to do cursive because that’s going to come. It makes me so mad. The point is it doesn’t matter. It could have been education. It could have been the credit card companies pushing it. It could be the way that we handle credit. We suck at it. With the best of intentions, people like Dave Ramsey and a whole bunch of other financial gurus out there, they pushed the safe and practical lifestyle choices and the safe mindsets. Sometimes because they’ve seen that the average American can’t be trusted with unlimited debt. We’re an immediate gratification society, FOMO, YOLO. That’s what we do.
Even my boy, Joel Larsgaard, from the fantastic How To Money, he was on episode fifteen with me. We had a little discussion about the 20% down topic and we had a disagreement. We did discuss it civilized and we listened to each other with mutual respect. It was very non-American. He’s so nice. It’s like he’s Canadian or something. My position is that if you’re educated, disciplined and you understand what you’re getting into that, you can use the ninth wonder of the world. I know Dave Ramsey and Albert Einstein. You’re all going to tell me that the compound interest is the eighth wonder of the world and I gave it to you. You’ve got it.

HBH 44 | Down Payment Options
Down Payment Options: Interest rates are at 3% right now. They’re the lowest they’ve ever been ever. They will only go up while you’re waiting those five to 10 years to save enough for a 20% down payment.

It outranks mine number nine, but number nine is leverage because when you use leverage wisely combined with the simple math of trying to save 20% in this real world, while at the same time, you’re trying to save that while you’re burning rent every month, like a bomb over a trash can in some old movie. There are two very strong sides to this argument and Dave Ramsey and a bunch of other people, they preach 20% and pay your house off in fifteen years, never have a mortgage. It breaks down to a larger macro-economic argument. It’s about the best way to leverage your money.
Either you’re paying as much as you can into a solid hard asset that you get to live in with a proven track record of a 3% to 4% annual gain over a 10-year period or you leverage that asset by taking out a large loan and pay it off at the minimum monthly. That means that you’re going to have a larger monthly cashflow that you can invest differently. Trust me, scour the internet. You’re going to see tons of arguments for both sides. You’re going to hear a bunch of people say, “Always pay off your mortgage as fast as you can and live in a free and clear home.”
You’re going to see other people, these big financial guru guys that say always carry a mortgage on your primary home and use your monthly cashflow to grow your other assets. A real-world example of this is I talked to an East Coast realtor. She’s a unicorn and was helping some of my folks out there. She’s downsizing. She has a giant six-bedroom colonial home. She’s had it for years and years so the mortgage is paid off and she was cashing out big. She was going to downsize to a smaller home. Smaller home with the proceeds of the sale, she could have purchased it three times over with cash.
When she talked to her financial advisor about buying that home for tax purposes, and she told him that she was going to pay cash, her financial advisor said, “Are you effing kidding me? Why?” No, put a small down payment. At most, you can put 10% down and borrow $500,000. You’re going to get that for 3% interest. It’s the cheapest money has ever been. Let me put that $500,000 to work for you. Even if we put it in extremely conservative and safe investments, we can make 5% to 8% easy. There’s an old saying about economists. If you get five economists in one room and you ask them for the best theory and best economic plan to run a company or a government, you’re going to get five wildly different answers. They all will have merit in some capacity.
In general, I usually help present all the options to the buyers, but it is up to them. Everybody lives differently. Everybody budgets differently in their own life. What some people consider super aggressive saving and other person might think, “That’s not even saving enough. Everyone’s different.” Here’s some food for thought when you’re hearing people tell you, “You’ve got to have 20% down. You need to be in a situation where you are debt-free.” I get it. As far as buying a house, the 20% philosophy was forged out of the Great Depression when everyone suddenly realized, “Maybe it’s a good idea to have a few extra bucks in my pocket and not have such a big payment every month.” Since then, for the average individual, home prices have gone up, but wages have stalled in comparison.
If you talk to your grandparents, here’s where their headspace was. In 1975, they bought a home for $32,000. The average salary that year was $11,000. That one year’s annual salary was 33% of the home. If you’re talking to your parents in 1996, it was $110,000 to buy the average home. The average salary was 24%. It had dropped. That average salary was only 22% of the price of the home, dropped from 33% to 22%. Now $350,000 home average salary, $68,000. That’s only 19%. If you’re not making as much, it’s not quite as easy to save up for that 20%. What are you doing while you’re saving for that 20%?

The Big Formula

You don’t make money until you’re out on your own. When you’re out on your own, you’ve got to pay rent. It truly is a mindset. Economies change. We have to remember that prices versus wages have gone way up. It’s going to take a lot longer for you to save 20% down. Here is the simple math on that. This is the big formula and one of the major reasons why sometimes I have a difference of opinion with people on 20% down versus a low down payment. Now $300,000 home is going to cost you about $2,100 a month, PITI, your principal, your interest. We’re going to throw in there, your taxes and your insurance as part of your payment.
$2,100 a month for full principal, interest, taxes and insurance. That’s based on early 2021 screaming low-interest rates. Say that you’re paying $2,000 a month in rent and it took you a year or two years to save up while you’re paying rent. You’re trying to save up for the lowest down payment you can do is 3.5%. That’s an FHA loan. You’re paying $2,000 a month rent, but you’re sucking away and trying to save up 3.5% of $300,000. That’s going to be $10,500. You throw in another $5,000 or $7,000 for closing costs. That’s on the high end, but I want to show that I’m not skimpy on the numbers so I can offer a fair and balanced opinion.
That means 3.5% on $500,000 purchase is $10,500 plus $5,000 or $7,000 that’s $15,500 or $17,500. That’s what you need to purchase a home. If you do purchase that home and you’re paying $2,000 in rent, your monthly payment is going to be almost the same at $2,100. Here’s where the math gets a little different. Remember I told you this payment has PMI. That’s the Private Mortgage Insurance, that extra payment, that thing that if you say it to someone over 40, you can watch their skin start to crawl. People hate it. That PMI payment varies. If you’ve got great credit, 760 or higher, that’s going to cost you $62 a month. If your credit is more in the middle at 720 or higher, that’s $105 a month. If your credit is at 680, it’s going to cost you $162 a month. That PMI is not part of a loan if you’re having 20% down. There’s a difference between 3.5% down payment and 20% down payment, 20% is $60,000, 3.5% is 10,500 for a difference of $49,500.
Let’s go back to the beginning. You’re looking at a $300,000 house. You’re paying $2,000 a month in rent. You’ve got to save up that $10,500 plus you’ve got to save the closing cost. You think at $15,000, $16,000, $17,000, you’ve got to save. You probably need a couple years, but let’s say it takes you a year to do it. If you’re psycho and could save $17,000 a year, then now you’ve got to get another $49,000 to get to 20%. It’s going to take you how many years for to save, to get to 20% down? Here’s part one of the formula. You can do that 3.5% down payment, but it’s going to cost you an extra $260 more in mortgage because 20% down your loan is lower.
With 3.5% down, you have to pay more on the loan. That costs you $260. Trust me, I did the math on that. For many of you, you’ve already tuned out. Your brains have already turned to mush. It’s a lot of numbers coming at you, but it’s simple. The 3.5% down payment, you’re paying $260 extra every month versus putting 20% down. We have to put the PMI on it. That came in the three different levels, $62, $105 or $162. Let’s take the middle one. You’re going to pay $260 plus $105 a month. We add the extra mortgage payment because your loan is higher. That’s 260 plus the $105 PMI. That’s $365 a month. You can make the decision and wait and try to save. You want to avoid that extra $365 a month.
[bctt tweet=”How much money it takes to make a down payment for a first home purchase? Empty out your pockets and find out. You can do this!” via=”no”]
You can work hard and get rid of that nasty PMI. You can try to save $49,500. How long is that going to take 5, 10 years, who knows? You can purchase a 3.5% down and loan yourself $49,500 at $365 a month. You can buy with 3.5% down and it’s going to cost you an extra $365 a month, or you can try to save that $49,500. You don’t have to save that $49,500. You can pay an extra $365 a month. It’s like loaning yourself the money. You don’t have to keep running and getting nothing in return for 5 to 10 years, you pay the extra $365 in monthly installments while you own the house.
You reap all the benefits of being a homeowner versus waiting on the sidelines. Paying $2,000 a month in rent that goes nowhere to the tune of $24,000 a year. If it takes you five years to save that $49,500, you’ve thrown away $120,000 in rent just so you can save $365 a month. Loan yourself the difference between 3.5% down and 20% down. In this scenario, it’s $49,000. Loan it to yourself for $365 a month, pay in installments. You do that because you don’t want to be paying $120,000 over 5 years in rent while you wait to save that money to get you to 20%.
Part two of this formula, you know what happens during that 5 to 10 years? I don’t, nobody does. What’s going to happen to the $300,000 house? Is it still going to cost $300,000? Is it going to be more? It might be less, you’ll never know. What about interest rates? They’re at 3% right now, the lowest they’ve ever been like forever lowest. They can only be up while you’re waiting those 5 to 10 years to save, to be someone who puts 20% down because that’s what you were told you were supposed to do.
Remember this is my opinion. With now higher home prices versus wages and the time it takes to save that extra 16.5%, if you plan on renting during those years and you’re trying to save that 16.5% from 3.5% down to 20% down, in my opinion, the math speaks for itself. If you didn’t get it, go back to this example a few times, maybe grab a piece of paper and write it down because I know it’s numbers in your eyes right now. It’s confusing. If you don’t understand that one, go back to the example a few times and get it for reals.
I would like everybody out there to grasp this concept. I’m fine. Once you grasp the concept, if you disagree, that’s great as long as you get it. We all do our own thing. We all make up our own mind. There are some people that it’s easy for them to save one way and some people need it to be completely different with automatic things taken out of their account and whatever works for you. I tell all my buyers all the time, “Once we’ve done this financial consultation, it’s up to you. It’s your life. I’m not going to live in the house that I help you buy. I sure as heck am not going to help you make the payments.”
A bonus on the PMI that we were talking about, the PMI goes away. That little extra payment we had, it goes away at some point when the value of your home increases. On an FHA loan, it’s stuck to it for eleven years. That’s been a change over the past few years, but it didn’t used to be that way. Now it has to stay on there for eleven years, no matter what. If at the end of eleven years that the home has increased in value by 18.5% and that could be both an appreciation as well as your principal reduction that you make through your payments then PMI has gone after eleven years. You can take that off your monthly ledger because I’m sure that you do a budget out for 30 years.
If you do what we call a conventional loan, a 5% down loan, a low down payment, instead of the FHA loan, you don’t even have to wait eleven years. All that formula that we did before, if you do 5% down and the home appreciates by 17%, then it goes away. I’ve been told that when your home increases to 15% through appreciation in principal reduction in your payments, it’s supposed to be 17%, but I’ve been told that if you call the bank and you’re forceful and you pull Karen and asked to talk to a manager that you can get it dropped at the 15% mark. If the market goes up 5% for the first 3 years that you own the home, you could get rid of the PMI by year 3 or 4.
Here’s a question I get asked a lot because this crazy red-hot multiple offer market that’s happening in 2021, people say, “I heard a low down payment screws me in this market. What do I put down? I don’t want you to get beat out every single time by the 20% offers. Sometimes it is tough depending on the listing agent and the seller. Sometimes you don’t get looked at with the same validity as a 20% down, but you see any loan 3.5%, 10%, 20%, even 50%, they need to be verified in a hot market like this. If multiple offers coming in, the seller has the option to be choosy. Many of them are going to check every single loan before they even accept the offer.
That happened to me as a matter of fact. Once we got verified, they took our offer and we are good to go. Once the seller and this listing agent verified all the loans, then they’re all the same. They all look like cash. That’s when it comes down to a few things that the low down payment might hurt you. First of all, is your agent a pro? Are they going to close the deal? That’s what they’re looking at. They’re also going to be looking at the lender. Are they pro? Whether it’s a small payment or a large down payment, if the lender is no good, sometimes they won’t pick them even with a big down payment. Where it can be perceived as a negative compared to a larger down payment is let’s say you’re in the deal and something needs to be renegotiated.
The seller is not going to budge. That means the buyer’s going to have to come up with the extra money if there’s an issue with the inspection or the appraisal. A low down payment can’t finagle any more money by changing their loan. If you’re at a 10% loan, you can drop to a 5%. You’ve got extra cash that you can throw at the problem, whatever it is, 20% loan can drop to 15% or 10%. They’ll take the PMI hit, but they’ll use the cash to fix whatever the problem is, throw it at the seller and close the deal. However, I have seen people with 15% or 20% down elect to go down at 5% at the very beginning of the deal. What they do is they show the seller with the offer, “I’m only 5%, but I have all this extra cash.”
As long as the loan gets verified and your extra cash gets verified, that 5% is not different than a 20%. I hope that answers the question. I’ve got a great blog reader who’s looking for someplace up in LA and she’s awesome. We’ve been having a lot of fun. She’s a real smart individual. We were talking about things. We ended up finding a place that is a little dated and needs some work, but it’s perfect location-wise. She was like, “I don’t have any money. I’m going to be getting this money later on. Right now, I’d like to do that stuff.” She’s decided, “What’s there between 5% and 3.5%?” She’s going to drop from a 5% to a 3.5% to have that little 1.5% extra chunk of money. She can use that for her remodeling.
Some of the other things that if you try to go back to some other episodes, you can read how people have changed their down payment for whatever worked with them. Episode 33, my favorite peeps, Alvin and Ashley, young up-and-comers. We had long conversations because they had stock options that were coming due. They have retirement funds and annual bonuses. Their $20 pockets had lots of pockets to consider. They could have waited and gotten a bigger down payment, but for them, they decided they want to get in soon. After all those long discussions, they decided to go for it. When they get that extra cash from the stock options and the bonuses, they can pay down the mortgage or maybe invest in other properties.
Speaking of investing out of the properties, episode 37, I talked to Kyle. He decided to go low down payment on a multi-unit and then the same year, low down payment on another one. He’s going to go low down payment on an apartment. He could have taken those three low down payments and put a bigger down payment on one thing, but he did the math. He’s comfortable with it. He’s betting on himself and betting on his spreadsheets.
If you don’t even have the 3.5% down and you’re wondering, “I listened to the podcast to find out how much do I need.” It’s going to have to be 3.5% unless you’re a veteran, then you can do zero down. If you’ve gone back to episode 38, which I mentioned, that’s the 2021 forecast and episode 40 on, “Should I buy or should I wait?” and you see things the way you’re moving and you want to get into this market, then you go back to episode 30. That’s where I discuss all the ways to borrow from the bank of M and D. That’s the bank of mom and dad, or looking for any friend or family. Maybe you’ve got an uncle or someone that’s like, “For 3.5% down, I can give you $15,000, $17,000.” You pay them back. It’s called a gift.
Sometimes the banks will let you be approved for that. In episode 22, that’s where I break down, pulling from your 401(k). If you don’t have enough for a down payment, you can get up to 50% or $50,000 without a taxable event happening if you’re using it for a primary home. This is another controversial topic that a lot of people freak out about touching their retirement. That’s episode 43, check that one out. There’s a whole lot of conversation about retirement in that one.
There it is. That’s attempt number three, which is supposed to be the question of the week, the short episodes, what a massive epic fail. I had to do it. I cannot give you guys the cliff notes. It’s too important a question. Thanks a lot. You guys rate, review, subscribe, check me out on Facebook, How To Buy A Home group. You can always find me on Instagram if you have questions about your specific situation, @DavidSidoni, the website, DavidSidoni.com. It’s where you can find everything. It’s got links to Facebook and Instagram. The YouTube page has such a whole bunch of videos. I’m going to be thinking about getting on Clubhouse pretty soon as trying to do some live Q&As. You can ask me these questions and hear if I can ramble to you like I ramble to myself at 2:42 in the morning in my house. The answer to the question, “How much should you put down for your down payment on your first house?” Empty your pockets and let’s find out. You can do this.

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This podcast was started for YOU, to demystify things for first time home buyers, and help crush the confusion. After helping first timers for over 13 years, I knew there wasn’t t a lot of clear, tangible, useable information out there on the internet, so I started this podcast. Help me spread the word to other people just like you, dying for answers. Tell your friends, family, and perhaps that random neighbor you REALLY want to move out about How to Buy a Home! A really easy way is to hit the share button and text it to your friends. Go for it, help someone out. And if you’re not already a regular listener, subscribe and get constant updates on the market. If you are a regular and learned something, help me help others – give the show a quick review in Apple Podcasts or wherever you get your podcasts, or write a review on Spotify. Let’s change the way the real estate industry treats you first time buyers, one buyer at a time, starting with you – and make sure your favorite people don’t get screwed by going into this HUGE step blind and confused. Viva la Unicorn Revolution!
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You Might Also Be Interested In:

Ep. 234 – Interview With Yadi and Victor – Dreamed Of Homeownership And Found A Way
Ep. 230 – NAR Lawsuit – The New Rules For Real Estate And How To Buy A Home – PART 1
Ep 229 – What Is A Unicorn Real Estate Team?
Ep 228 – Interview With Andrew And Melissa Who Did NOT Need 20% Down To Buy And Bought Their First Home In A Matter Of Weeks!