Buy Now With 5 Percent Down or Wait to Save 20 Percent: The Math Makes the Answer Very Clear

The Question That Sounds Responsible but Has a Surprising Answer

Waiting to save a 20 percent down payment before buying a home sounds like the financially disciplined choice. Avoid PMI. Get the best loan. Lower monthly payment. It is the conventional wisdom that gets repeated constantly in personal finance conversations.

But conventional wisdom is not always correct and on this particular question the math tells a story that most people waiting to save 20 percent have never actually run.

The Numbers on a 500000 Dollar Home

Here is what the comparison actually looks like.

Option one is buying now with 5 percent down. On a $500,000 home that is $25,000 out of pocket. With good credit PMI on a loan at that down payment level runs approximately $170 per month. Over four years that is $8,160 in PMI payments.

Option two is waiting four years to save the full 20 percent down payment of $100,000 before buying.

Here is what option two actually costs you. At a conservative 5 percent annual appreciation that $500,000 home is worth approximately $607,000 four years from now. The home you could have bought today for $500,000 now costs $607,000.

You spent four years waiting and saving to avoid $8,160 in PMI. And the price of the home increased by $107,000 while you waited.

The Real Cost of Waiting

As Tom Seaman explains the math is not close. Waiting four years to save 20 percent down on a $500,000 home costs you $107,000 in additional purchase price to avoid $8,160 in PMI. You spent $107,000 trying to save $8,000.

That calculation does not include the rent you paid during those four years while someone else's equity grew. It does not include the principal paydown and equity you would have been building in your own home during that period. And it does not account for the fact that the larger down payment required four years from now is $121,000 rather than $100,000 because the price of the home increased.

Every component of the waiting strategy compounds against the buyer while the buy-now strategy compounds in their favor.

What PMI Actually Represents in Context

PMI is not a penalty or a punishment. It is insurance that protects the lender when the down payment is below 20 percent and it costs a relatively modest amount on a monthly basis relative to the financial benefit of getting into the market now rather than later.

On a $500,000 home $170 per month in PMI is the cost of capturing a $500,000 asset today rather than a $607,000 asset four years from now. Viewed through that lens PMI is not something to be avoided at all costs. It is a relatively inexpensive tool that enables a purchase that the numbers strongly support making now.

PMI also does not last forever on a conventional loan. As the loan balance decreases through principal paydown and as the home appreciates the loan-to-value ratio improves and PMI can be removed when sufficient equity is reached. The $170 per month is not a permanent fixture of the monthly payment. It is a temporary cost that goes away as equity builds.

The Conversation Worth Having Before You Keep Waiting

If you have been putting off buying a home because you are trying to save a 20 percent down payment the most valuable thing you can do right now is run the actual numbers for your specific market and your specific situation. The appreciation rate in your area, the current home prices you are targeting, and the actual PMI cost on a lower down payment loan all combine to tell you what waiting is actually costing you rather than what it feels like it is saving you.

Tom Seaman works with buyers to run exactly this kind of analysis and to make sure the decision about when and how much to put down is based on real numbers rather than conventional wisdom that does not hold up under scrutiny. Reach out to Tom Seaman to find out what the math looks like for your specific situation right now.

Sources

NAR.realtor Investopedia.com MortgageNewsDaily.com FannieMae.com BankRate.com