The Myth of the Down Payment Barrier

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down payment myth

If you ask someone why they haven’t bought a home instead of renting, most of them say they don’t have the down payment.

20 percent of the average cost of a home in the Inland Empire can be a daunting figure. Many young couples feel it will take them at least 10 years to save up enough to purchase a home. What they don’t know is that you don’t necessarily need twenty percent to buy a home.  The average family is purchasing with between three and five percent.

The next barrier is the monthly mortgage payment.  Well, let’s look at this from a financial planning angle. 

The average monthly rental for a house in the Inland Empire is between $2,000 and $2,500. If you were to purchase a similar home it would cost between $350,000 and $550,000. So for a house that sells for $450,000 with a three percent down payment, you’d need only $13,500.  Or if you pay a five percent deposit, you’d need $22,500.  That’s is not out of reach for most families.

If you were to purchase a $450,000 home with a three percent down payment and a four percent interest rate your mortgage payment would be $2,541.00 a month.  That’s the same as the rentals in the area. If you chose to buy a more expensive home at $550,000, you’d need a $16,500 down payment and your mortgage would be $3,000 a month.

Real Estate Financial Facts

Despite the ups and downs of the market, property values increase over time. Our parents could buy a home for $30 000. 25 years ago you could buy a mansion for $300,000 in Anaheim. Now, that would buy you only a small home in a not very desirable neighborhood.

The average appreciation of a home in the Inland Empire is four percent a year. If you’ve been renting for ten years, not only are you losing that money, you’re also losing the increase in the value of the property.  You’re paying someone else’s mortgage while their property appreciates in value.

If the increase in the monthly payment presents a problem, there are programs that you may qualify for – like the Mortgage Credit Certificate program (MCC.) This program allows you to deduct 20 percent of your mortgage interest from your taxes, on top of your usual deductions for interest and property taxes.

When you rent you aren’t eligible for any property deductions. But if you were to buy a home and use the MCC program, you could receive a healthy tax credit.

Here is a sample MCC calculation that shows how this works:

$550,000 (mortgage amount) x 4 percent (mortgage interest rate) x 20 percent (MCC percentage)
= $4,400 (eligible credit amount)

You could claim that $4,400 in credit on your annual tax return. That goes a long way towards bridging the gap between your rent and the mortgage payment for a home you own. 

And here’s the best part: When you look at your family’s balance sheet at the end of a year, rent paid out is money spent. It’s gone. You are worth that much less.

When you own a home it’s a very different story.

The average increase in home value in the Inland Empire is four percent, so after one year you’ll have paid $36,000 off the mortgage and your house will have grown in value by $22,000. That’s a vastly better financial picture.

If you need assistance figuring out how you can buy a home, what down payment you need, and which programs you qualify for so you can improve your family’s financial future, give us a call.