Saving up to buy the house you’ve always wished for is part of the coveted (but potentially outdated?) American Dream. In many ways, it’s a life achievement that represents success. If you own your own home, not only have you “made it”, but you’ve somehow mastered this thing called “adulting”—a feat that, let’s be honest, we’re all trying to figure out. Yet with more millennials renting than buying, and a recent Forbes article stating that 46 percent of millennial renters would purchase a home if they had enough saved for it, it seems like gathering up enough money to put down on a home is hindering that particular monumental accomplishment.
In their story, Forbes argued that the biggest mistake millennials are making is unnecessarily saving up for an expensive down payment. The rationale is that millennials should use ways around putting down a lot of money upfront, to be in a better position to purchase a home.
Since millennials account for over one-third of the homebuying population (the largest group of homebuyers today), we tapped our favorite financial expert to see if that’s actually true. Turns out, a lower down payment isn’t necessarily better. Between the monthly mortgage, furnishings, closing costs, and maintenance, you’re going to need more money than you think to be totally ready take the plunge towards homeownership. But that doesn’t mean it has to be scary. Being prepared and knowing about the cost breakdown will save you stress—and debt!—down the line.
Buying a home and having enough money to live your life comfortably? Now that’s #adulting at its finest.
Let’s get the basics out of the way: You should expect 30 to 38 percent of your income to go towards housing. This is the status quo, as reported by a 2016 U.S. Department of Labor consumer expenditures report which proved that at the end of the day, housing is most people’s largest expense. That fact alone can seem daunting, but it’s helpful to keep in mind when it comes to budgeting how much you’ll be able to spend on a mortgage—or even when determining if a mortgage is the right move for you.
Priya Malani, co-founder of Stash Wealth and finance guru extraordinaire, seems to think the latter step is crucial, telling us that the first thing to do is determine whether buying a home is actually the best idea for your lifestyle at all. “Buying a house is a cornerstone accomplishment of our culture, but buying a house isn’t right for everyone,” she explains. “A lot of millennials want flexibility, and a house is the very opposite of that. Also, it’s common thinking that a home is a great investment but for the majority of the country, it’s not!”
That said, if you do end up determining that buying a home is the right route to take, there are ways to ensure owning a property is a fruitful investment.
In that case, the next thing you need to understand is this: You own some of your home, and so does the bank. As Malani explains, “Home equity is how much of a home you own versus how much the bank owns. Your mortgage is the difference between how much you own and how much the bank owns. For example, if you purchase a $250,000 home with a downpayment of $50,000 of your own money, your home equity is $50,000, but the bank owns the rest.” Using your money as home equity means you won’t have access to that value until you sell your home—something that’s important to consider when deciding if you’ll have enough money to cover your monthly mortgage payments down the line.
TL;DR: Making that down payment is just the beginning. You’re going to need to have a reasonable cushion beyond that initial down payment cash.
“Tying up too much in your home equity (an illiquid asset) means your money can’t work harder for your elsewhere! Also, by focusing on putting all your savings into a home, you’re essentially neglecting the other goals you may have, like family planning, travel, upgrading your lifestyle, paying down student loans, etc,” says Malani.
And despite Forbes’ argument that you can put down a super low percentage upfront to avoid that situation, Malani believes that saving for 10 percent down is the perfect happy medium. This avoids the issue of what she calls “buying too much of the house”, and subsequently not being able to meet those monthly payments, or buying too little, and risking higher payout in the long run.
So while the expectation of saving for a large down payment shouldn’t deter you from going ahead and following those home-owning dreams, you will need to find a strategy that works for you. Down payments aren’t the only expense you’ll need to save for when it comes to owning your own place, but they’ll likely be the highest amount you’re putting forward at one time.
Malani’s final words of wisdom? “You should balance your idealized desire to own a house with reality, and then consider your other goals. And remember, renting IS NOT throwing money away.”
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