When You Shouldn’t Bother Saving A 20 Percent Down Payment On A Home

There is a perception that one of the golden rules of home buying it’s that you should always have at least 20 percent saved for a down payment. But the reality is, it is not easy to save up 20% for a home especially if you are living in an area where houses values are so high, like New York City or Los Angeles.

Still, while ideal in many cases, saving up a down payment of 20 percent isn’t always the best choice. Here’s when you should consider putting down less.

1. Home values are rising too fast

In places such as Los Angeles, housing pricing increase rapidly. House values increased by 2.7% from 2017 to 2018 in LA.

So lets say today, you have $50,000 (10%) to put down on a $500,000 home, but you want to wait to save the extra 10% before buying a home. So you wait another 3 years to save up the $100,000 for that $500,000 home, but 3 years from now, that house that is $500,000 today, might cost $550,000.

As you can see, if you wait, the value of homes might go up. You still end up having to pay less than 20% down and loss on gaining the $50,000 equity into the house if it was purchased 3 years ago.

Plus, all that time you were saving up the extra $50,000, you could have been paying down my mortgage instead of paying rent.

2. You need cash for home improvements

A common issue that new homeowners run into shortly after buying is a shortage of cash. And if you have major expenses that pop up a month or two after closing, you could be in a tough financial position.

A lot of times homeowners do not factor in the expense of moving, any immediate repairs that have to be made in the home, new appliances, etc in their financial planning for their new home.

Rather than immediately tying up every cent you have in your home, it can be a good idea to keep some cash liquid so you have a cushion against these added expenses and avoid taking on higher-interest debt such as credit cards or a personal loan.

3. Your lifestyle demands it

Finally, though you might be able to wait to save a 20 percent down payment, your lifestyle might demand that you become a homeowner sooner.

For example, a family may decide it’s worth the increased costs to have their children be in a good school district or in a good neighborhood, without the risk of moving each year because of increasing rents or the landlord deciding to sell the property.