It’s no secret that the housing market has been very difficult lately, due to a combination of factors like inflation , exploding mortgage rates and high home prices — which in turn, are leaving a lot of buyers on the sidelines. Consider this: in June, the median sales price reached its highest price ever recorded for the second consecutive month, according to the National Association of Realtors (NAR) , at $426,900.
In turn, down payments — which generally vary between 5% and 20% — are ballooning and represent an unreachable sum to set aside for many would-be buyers.
Against this backdrop, there’s also a slew of other factors to consider before buying a home — and placing a downpayment.
“Chasing the moving target of a down payment for rising home prices can feel maddening but don’t let it put blinders on you,” said Stephen Kates, CFP, principal financial analyst for RetireGuide.com . “There are many important factors to consider before taking the plunge on a home, even a dream home.”
Have Enough Savings to Make the Largest Possible Down Payment
A downpayment is, generally speaking, at least 5% of the price of the home. Some experts also recommend a 20% down payment, enabling you to avoid paying private mortgage insurance (PMI) on a loan.
According to Jay Zigmont, PhD, MBA, CFP, founder of Childfree Wealth, in a high interest rate environment, you want to make as large of a down payment as possible. As he argued, putting down 20% won’t only save you on PMI but also interest. Zigmont also noted to keep a balance between your down payment and an emergency fund.
“Any interest you avoid is effectively the same as a tax-free return of that interest,” Zigmont said. “Before you buy a house you should aim to be debt free, have a six-month emergency fund and a 20% down payment. For many people that may mean putting off buying a house.”
According to Steve Sexton, CEO of Sexton Advisory Group , if 20% seems out of sight, establish a dedicated savings plan and consider options like down payment assistance programs while understanding any associated implications.
Understanding Mortgage Trends and Rates
Another factor to consider before putting a down payment on a house is understanding mortgage trends and interest rates — something Sexton deems “crucial.”
“ Higher rates lead to higher monthly payments, so shopping around for the best rates and potentially locking in a rate if increases are expected is beneficial,” Sexton said. “Also, be aware of the differences between fixed-rate and adjustable-rate mortgages to choose the best option for your financial situation.”
For instance, while rates have ticked slightly down — standing at 6.73% as of August 1 — it’s a far cry from where they stood a few years ago: 4.99% for the corresponding week in 2022, and 2.88% for the corresponding week in 2020, according to Freddie Mac data.
In turn, Realtor.com economist Jiayi Xu, said that even with a potential rate cut in September, “subsequent drops in mortgage rates may not be as significant as many anticipated because the market is already pricing in rate cuts and such expectation is reflected by recent rate drops.”
Budgeting for Additional Costs
Make sure to incorporate the total cost of home ownership into your plans, as the mortgage and interest payment are only part of the equation, said Kates, noting that property taxes, insurance and monthly maintenance costs will add to your monthly costs and will likely rise over time, said Kates.
“A good guideline for housing costs is keeping them at or below 30% of your gross income but this varies based on your situation,” he added.
And don’t forget to leave yourself a little wiggle room for surprises.
‘If you spend every cent of your savings on the down payment, you will leave yourself unable to cover unexpected repairs, new furnishings, or upgrades,” Sexton said.
For instance, as Sexton noted, closing costs range from 2% to 5% of the home’s purchase price, so it’s important to factor these into your budget as well.
Get Your Finances and Credit in Good Shape
Some experts also noted that whether or not you can obtain a loan, and at what interest rate, is largely determined by your credit profile: lower rates go to those with the best credit, said consumer finance expert Kyle Enright, president of Achieve Lending.
In the same vein, Sexton advised to “conduct a thorough financial health check.” As he noted, in addition to maintaining a good credit score, managing debt effectively improves your chances of securing favorable mortgage terms.
“Additionally, ensure you have an emergency fund covering three to six months of expenses to handle unexpected costs without jeopardizing mortgage payments,” Enright said.
Consider Whether Renting Is Better – For Now
With that being said, perhaps waiting to put a down payment on a home is your best (financial) bet at the moment, some experts conceded.
As Kates argued, if you are a renter, it might be worth considering whether you are in one of the areas where renting is significantly less expensive than owning a home.
“Based on the most recent Census data, there are more than 150 US cities where the average renter would save $500+ per month compared to a new homeowner,” he said, adding that many parts of the country are seeing home price weakness as buyers wait for better mortgage rates, and sellers lose patience.
“Joining the ranks of those waiting for lower interest rates may benefit you with a lower monthly payment in the long run,” Kates said. “It is important to remember that home ownership is primarily a question of cash flow. If you can’t afford your monthly payment you will have trouble improving your financial position.”
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