Realty Times February 21, 2007

It's Time To Save For A Down Payment
by Broderick Perkins

With home price appreciation hitting the brakes in many markets it's a good time to take time to save for a down payment.

It's not easy.

Saving for a 20 percent down payment will get you a shot at the best mortgage rate, no mortgage insurance and a chance to call some of the shots with your lender, but it can take some time.

The national median home price for all existing homes was $222,000 in December, unchanged from December 2005, according to the National Association of Realtors.

For all of 2006, the median price rose by only 1.1 percent to $222,000, up 1.1 percent from $219,600 in 2005.

Even 20 percent down on a $200,000 home ($40,000) is a big chunk of change to save -- more than $3,300 a month to reach the goal in a year, $1,650 a month for a two-year savings binge -- without considering interest.

But it's almost always worth it to save something, even less than the full 20 percent, especially if you have more time and aren't pressed by the prospect of the current soft market turning hard.

Why?

  • Right now, time is on your side. With home prices flat and falling in some regions there's less danger of getting priced out of the market by appreciation while you take time to save. Some experts say home prices are poised to run in place in 2007 and may not begin to warm up for another run until 2008. How much time you really have is anybody's guess.

  • Also, right now, getting hooked by lures of easy-money and high leverage, low- and zero-down payment loans to finance for as little out-of-pocket money as possible right now is getting risky. High leverage loans are much better suited for a fast appreciating market where your home quickly generates equity to compensate for your small or missing initial stake.

  • Saving reduces costs. Save enough for the down payment and you can remove the need to pay back another bill, say a second mortgage, to cover the down payment, while you also struggle with the first mortgage. Saving also gives you the opportunity to lower financing costs, especially the cost of mortgage insurance, which you won't have to pay if you have 20 percent or larger down payment.

    You can also reduce the size of any second mortgage you may still need.

    Even saving only enough for all closing costs, property insurance and other initial costs to finance your home is a worthy goal that takes some of the financial bite out of home ownership.

  • The more you save, the more lenders like you. That's because the larger the personal stake you have in your home the more you lower your risk of defaulting, risk-based studies reveal. Your stake is instant equity to burn should you need it down the road for emergencies and as some protection against flat and falling prices.

    You'll still need to qualify, be creditworthy, and have employment security to get the best deal no matter how you go in, but saving can give you an edge.

    "It's a balance. If they like the FICO score, the more you have for the down payment, the less risk it is for them, for the appraisal. The more you have, the more secure you are in getting the financing and the less risk there is," for you too, said Kathy Toth, a real estate agent with Real Estate One in Ann Arbor, MI.

    For many first timers, savings is all they've got.

    NAR's 2006 Profile of Home Buyers and Sellers found savings was the down payment weapon of choice for 73 percent of first time home buyers. Among all buyers, 50 percent used savings and among repeat buyers, who more often use equity, 40 percent of them used savings.

    So how do you save for a down payment?

    The fundamentals apply. Set a savings goal within a reasonable time frame, cut your frivolous spending, save every penny you can, budget and consider a future without rent.

    You aren't saving for a car, vacation or shopping spree.

    Buying a home is a lifestyle change, one of the most significant you will ever make.

    "Many people think they're already putting as much money into savings as they possibly can or are willing to. The truth is, you can still probably accumulate a nice chunk of change through simple changes in the way you invest your money and manage your spending," said Craig Venezia author of "Buying A Second Home: Income, Getaway or Retirement" (Nolo, $24.99).

  • Stop being a Luddite about online banking.

    That doesn't mean go in wearing blinders. There are some convenience issues, but if you need the most bang for your savings buck online savings banks can give you whopper deals in a simple savings account.

    Federally insured, secure, highly-liquid accounts without withdrawal, minimum balance limits and other requirements, online banks cut the overhead and pass the savings onto customers in the form of higher interest rates.

    Right now HSBC Direct is offering a special, introductory and temporary 6 percent savings rate and a regular savings rate of 5.05 percent. EmigrantDirect offers 5.05 percent and ING Direct's annual rate is 4.5 percent.

    Short term certificates of deposits and money market accounts also offer better rates than traditional savings accounts so shop around, read the small print and set up an account.

  • Squirrel cash away. Plan on saving a fixed amount, 5, 10, 20 percent of each paycheck. If you can, have the amount automatically deducted from your paycheck and deposited or set up your savings account to grab a fixed amount from your checking account each month. Every penny counts. Collect spare change in coin wrappers and put it in your savings account.

  • Hoard windfalls. Stop spending tax refunds, holiday cash gifts, small lottery winnings and other forms of unexpected money. Save them. If you do get a tax refund every year have less money withheld from your paycheck and save it instead. Otherwise, not only to you miss the opportunity to save more, you give Uncle Sam an interest free loan.

  • Ant up, carry a heavier load. Blanche Evans, author of the National Association of Realtors "Guide to Home Buying" (John P. Wiley, $19.95) suggests getting a second job. Not only will that give you more money to save quicker, "it may be necessary to take on a second, part-time job to get our income at a high enough level to qualify for the home you want," she writes.

  • Cocoon spending habits. Remember, you are saving for a fixed period for a specific reason. Change, if only temporarily, until your goal is met. Stop eating out, avoid Starbucks and Jamba Juice, skip the cineplex. Do potlucks with friends, share the cost of "screening" rented movies at home and learn how to brew a decent cup of Joe and blend a smoothie, advises Eric Tyson and Ray Brown, co-authors of "Mortgages for Dummies." (John P. Wiley, $16.99) Fly like a butterfly later.

    Tyson, also says stop gambling. If necessary, get help for any compulsion. If you have to spend money on compulsions you might as well spend in on changing habits that cost you money.

  • Stop eating like, well, a pig. Fresh, unprocessed foods, especially produce, is better for you, your wallet and medical bills. Stop smoking and drinking booze. Likewise, run with the wolves or at least trot, walk or bike more places to save on the ever higher cost of gasoline.

  • Tame your spending habits. Go shopping for food, clothes and other needs only when you truly need them. Shop with a list. Stick to it. Discount shop outlets, sales and bargains. Mindless impulse shopping drains hundreds or thousands of dollars in potential savings. Give up vacations, road trips and reckless holiday spending. Return to the wild after you buy a home, if you can afford it.

    "What's a nonessential expenditure? Anything that falls outside the big-three categories of food, shelter and clothing and some of the more expensive or excessive items that fall within them," said Venezia.

  • Corral credit spending. Use only cash to make purchases, whenever possible. Keep one credit card for emergencies and perhaps online discount shopping for items you need, not items you want. Cut up others and instruct the issuer to close the accounts. Get a zero-interest card, if possible. Otherwise keep the one with the lowest rate or best cash-back plan. Get credit and or financial counseling for help with debts.

  • Leave the flock. Tell everyone you've resolved to save to buy a home. You won't rustle any feathers if they really care. Most will understand and not expect to see your generosity for a year or more. Stash money you would have spent.

  • Thin the herd. Have a garage sale. You get cash for your junk and less to move when you buy your dream home.

    • Copyright © 2007 Realty Times. All Rights Reserved.

    With an award winning staff of writers providing up to the minute real estate news and advice, thousands of REALTORS® in North America reporting daily market conditions, and a nationally broadcast television news program, Realty Times is the one-stop shop for real estate information. That's why over 10,000 real estate professionals have turned to us for their publicity needs.