We get it… saving money today is hard to do! Especially if you’re looking for an average priced house in Wichita ($164,312 in 2015 by the way) and trying to figure out where exactly you’re going to come up with that 20% your parents talked about. I mean… $32,000 to flop down on a house?! That’s a chunk of change. That any income level would have to think long and hard about.
Luckily, you don’t need 20% down to qualify for a mortgage. Not even close! Minimum downpayment is 5% on conventional loans and 3.5% on FHA loans! “Won’t I have to pay way more with PMI (Private Mortgage Insurance)?” is a question often asked next. Yep. You will. Now let’s talk about why when interest rates are in the low 3’s it’s still better to get in with a low fixed rate than to wait until prices and mortgage rates are up.
You save for 3 years to pile up $32,000.
Congratulations first of all. You’ve been a diligent money manager and you’ve done well. It’s time to turn that into a downpayment now. Turns out in the past 3 years that $165,000 house you wanted appreciated by 4% per year and is now $185,000. So… you’ve got a little more saving to do. (A few more months later…) Yay! Now you’ve saved $37,000 for your 20%. You’ve been renting the whole time so you have zero equity in what you’re leaving to transfer over. You’re payment with even a 1% bump up in interest rate (most predict they will be back in the 5s in the next year to 18 months) you’re new payment is $1000 per month.
You call one of our agents and buy while prices are low and mortgage rates are the lowest ever. (That’s now by the way)
At 5% of $165,000 your downpayment is $8,750 and your monthly payment including taxes, insurance, AND PMI comes to around $1,031 a month. That’s only $31 a month different than the 20% down route. Now, because you’re paying less owning than you would renting, you’re still able to save the same $37,000 in cash plus you would have paid off and additional $10,000 of loan principle while you owned!
Here’s where you’re at after 36 months in both scenarios:
Scenario #1: You have $37,000 equity and a $1,000 a month payment.
Scenario #2: You have a $1,031 monthly payment $18,750 in equity and $37,000 in cash totaling $55,750!