Tuesday, January 20, 2015

5% down payment now or wait and save 20%? Is it worth the wait?

Many people have asked me if it they should buy today, with 5% down and pay the premium or wait until they have enough for the 20% down payment and avoid paying the premium altogether.

If you want to purchase a $400,000 house and you have $20,000 saved for the down payment, 5%. The insurance premium for this mortgage would be $11,970. However, if you want to put 20% down and avoid the premium you would need to save $80,000 for your down payment.

Now we begin to question how long it would take to save up that $80,000. Let’s say it would take 5 years to save up $80,000 - about $16,000 a year.

Now if you purchased the house today with 5% down, paid the premium and put the $16,000 a year towards your mortgage not only will you have paid off the premium in under a years time but you will have a lower outstanding balance compared to buying with 20% down after your five years of saving is complete. Now you will have a lower payment and be 5 years closer to paying off that 25-year mortgage.  Buy now, don’t save and wait, especially since interest rates are at an all time low, therefore approximately 50% of your payment each month is going towards principal.