![\"couple](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/home-saving-1024x683.jpg?strip=all&lossy=1&ssl=1\")
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Backstory<\/h2>\n\n\n\n
Less than a year ago, my wife and I found ourselves in a situation where we were moving to a new city and were in the housing market. I was expecting to move in March next year, but I was offered a great new opportunity in late October that I couldn\u2019t pass down. <\/p>\n\n\n\n
While both my wife and I were excited about moving and the excitement that going to a new place brings, I was also extremely stressed out about money.<\/p>\n\n\n\n
You see, in my eyes, I was operating under the assumption that we wouldn\u2019t move until March. I thought I still had 4-5 more months of saving and really increasing the amount that we could put down on a house. It turns out that we didn\u2019t have that time, so we had to make do as best as we could. <\/p>\n\n\n\n
Luckily, we had been financially planning for a move for quite some time, knowing that my company will typically move employees every 2-3 years. So, we were planning for the next move before we even unpacked our boxes in Chicago. <\/p>\n\n\n\n
This was the first time we were buying a house instead of renting, and we had absolutely no idea where to begin. <\/p>\n\n\n\n\n\n\n
![\"man](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/studying-down-payment-and-mortgage-options-1024x683.jpg?strip=all&lossy=1&ssl=1\")
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I spent countless hours researching all the different types of down payment options. I wanted to ensure we maximized our savings by selecting the right down payment option. Picking the right one could easily mean $10,000s saved.<\/p>\n\n\n\n
As I mentioned, we had planned to buy a house for a while. While living in Chicago, we got engaged and married, both of which are extremely expensive — to get a ring and to pay for a wedding. Living in Chicago is even expensive by itself. <\/p>\n\n\n\n
So, while we had been saving for a while, it wasn\u2019t a shoo-in that we would just put 20% down. I spent a lot of time budgeting, saving, and researching to ensure we were optimizing our home savings. <\/p>\n\n\n\n
First, any extra money that was leftover from the budget went into our \u201cdown payment fund.\u201d But what should we do with the money saved for our next home?<\/p>\n\n\n\n
<\/p>\n\n\n\n
Options for How to Save for a House<\/h2>\n\n\n\n
Let’s cover the three options for saving for a house:<\/p>\n\n\n\n
Home Savings Option 1: Fifth Third savings account with .01% interest<\/h3>\n\n\n\n
I don\u2019t feel bad putting Fifth Third on blast about this because they deserve it. Actually, I feel as bad about calling them out by name as they do by only giving .01% interest \u2013 not at all. <\/p>\n\n\n\n
If I put $350 into the savings account every paycheck since moving to Chicago and took it out on the day that we closed on our new house, that $19,250 would be worth $19,252<\/strong>. <\/p>\n\n\n\n Wow. I actually laughed out loud when I ran this math.<\/p>\n\n\n\n I was really getting into investing in Chicago, and I sooo wanted to do this. I even convinced myself that I could just put it in the Roth IRA since you can take it out for first-time home buyers using it on a down payment on a house. I am ecstatic that I didn\u2019t. <\/p>\n\n\n\n This is where I am so incredibly happy that I did research and learned that if you\u2019re investing only in the short-term, the stock market can be very volatile<\/a> and is likely not a good idea. A dip, as we have seen due to COVID, could cut your available down payment by 20% nearly out of nowhere. That volatility is fine for long-term savings but not for a down payment next year.<\/p>\n\n\n\n If I put $350 into the S&P 500 every paycheck since moving to Chicago and took it out on the day we closed on our new house, the $19,250 that was put in would be worth $18,546, or a loss of $704. Ouch. <\/p>\n\n\n\n This is what we chose to do. It seemed like a good combination of both options. It was no risk<\/strong> for a decent return<\/strong> and a guaranteed return<\/strong> at that. <\/p>\n\n\n\n Most high-yield savings accounts offer between 3-4% returns. Read more about what these accounts are and how to start them here<\/a>.<\/p>\n\n\n\n In total, if we put $350 into the savings account every paycheck since moving to Chicago and took it out on the day we closed on our new house, that $19,250 would be worth $19,696. <\/p>\n\n\n\n Overall, a small increase of only $446, but that\u2019s $444 over the next best alternative. <\/p>\n\n\n\n Very happy this is the decision that we made.<\/p>\n\n\n\n <\/p>\n\n\n\n Now that we had decided on the saving method, the next topic was what we were saving for. What sort of down payment could we handle? I looked into tons of options and narrowed it down to the ones that stuck out most to me:<\/p>\n\n\n\n This likely seems obvious, but this is always the preferred option. Not only does putting 20% down allow you to have lower monthly payments, but most importantly, it keeps you from having to pay Private Mortgage Insurance (PMI). <\/p>\n\n\n\n PMI is essentially an insurance to the lending company in case you default on the mortgage. <\/p>\n\n\n\n Because you\u2019re paying 20% or more of the house value upfront, the risk that you will default is much less than if you were putting in less than 20%. This lower risk means you get to avoid PMI and trust me, you really want to avoid PMI.<\/p>\n\n\n\n I view this as 1B to paying 20% down. A piggyback loan is where you take out a mortgage for 80% of the home value, take out a second mortgage for 10% of the loan, and then put 10% down. <\/p>\n\n\n\n This is one of the options that we really strongly considered. <\/p>\n\n\n\n The offer extended to us was:<\/p>\n\n\n\n The major pro<\/strong> of this loan is that it allows you not to have to pay PMI while not putting down 20% for the down payment. <\/p>\n\n\n\n The major con<\/strong> is that for the first 10 years, you\u2019re going to have much higher payments because you\u2019re paying that second mortgage at a higher interest rate. <\/p>\n\n\n\n This type of loan is uncommon, but I think it\u2019s truly a diamond in the rough when used properly. It can take some of the stress off of saving for an entire 20% down payment which can easily be $60,000 nowadays.<\/p>\n\n\n\n The key is not to overextend your means with that second mortgage, but it can really come in handy for those that might have a good salary but haven\u2019t saved up enough for one reason or another.<\/p>\n\n\n\n This loan simply puts down 10% and takes out a 30-year mortgage on the remaining 90% of the home value. <\/p>\n\n\n\n Overall, this option isn\u2019t the worst thing you can do if you can afford the payment. However, you should anticipate paying PMI at least until you get 10% of the principal paid off in addition to the down payment.<\/p>\n\n\n\n Other options, such as a Rural Housing Loan (USDA Loan), FHA Loan, Conventional 97\/3, etc., offer many benefits on their own. However, these were loans we either didn’t qualify for or entertain because of the lower down payment. <\/p>\n\n\n\n In general, I know a lot of people use 20% as a threshold for a down payment, but I fall more in the 10% camp. I will be treating 10% as the baseline for down payments.<\/p>\n\n\n\n I highly recommend option 1 (20% down) and option 2 (piggyback loan)<\/strong>. In my opinion, avoiding PMI is an absolute must. PMI can set you back as you\u2019re paying a lot of extra money each month because you\u2019re a higher risk to the lender. <\/p>\n\n\n\n Many people think, \u201cI\u2019m paying $900\/month now for rent. I can get a house with a $900 mortgage too.\u201d That sounds great in theory until your AC breaks, you need a lawn mower, your home floods, etc. You have to pay for 100% of that, compared to 0% when you\u2019re renting.<\/p>\n\n\n\n In our first few months of home-owning, we\u2019ve had to replace our driveway and AC. At the same time, non-home-related expenses keep coming. The car needs new tires or I have a doctor’s visit. <\/p>\n\n\n\n <\/p>\n\n\n\n Please, save up enough to avoid PMI. You\u2019ll be happy you did. <\/p>\n\n\n\n Let me prove it to you. <\/p>\n\n\n\n I found a calculator online at https:\/\/www.hsh.com\/calc-pmi.html<\/a>, and it allowed me to project loan payments with PMI. Let\u2019s look at one specific example:<\/p>\n\n\n\n Entire Mortgage Loan \u2013 $160,000 (80% of $200,000)<\/p>\n\n\n <\/p>\n\n\n\n First Mortgage Loan \u2013 $160,000 (80% of $200,000)<\/p>\n\n\n <\/p>\n\n\n\n Second Mortgage Loan \u2013 $20,000 (10% of $200,000)<\/p>\n\n\n\n Note that I\u2019m also\nassuming the interest rate is 2% higher than the 1st<\/sup> mortgage, which\nis common for this type of loan, and that it\u2019s a 10-year payoff period.<\/em><\/p>\n\n\n <\/p>\n\n\n\n Total Monthly Payments for the Piggyback Loan:<\/p>\n\n\n <\/p>\n\n\n\n Entire Mortgage Loan \u2013 $180,000 (90% of $200,000)<\/p>\n\n\n <\/p>\n\n\n\n In summary, your total payments would look like this for the three loans:<\/p>\n\n\n <\/p>\n\n\n\n As you can see, your payments are considerably cheaper each month if you put down 20% and avoid PMI. <\/p>\n\n\n\n This is why putting down 20% is always the #1 best choice<\/strong>, without a doubt. <\/p>\n\n\n\n The next best choice might seem like the 10% down option, but I disagree. With the 10% loan, you\u2019ll notice that you\u2019re paying $82.50\/month in PMI, which is just being flushed down the drain vs. $0 PMI with the Piggyback loan. <\/p>\n\n\n\n Think of this as buying in bulk \u2013 the upfront cost of buying something in bulk is obviously more, but it might be less on a cost\/item basis. <\/p>\n\n\n\n This is very similar here. You\u2019re going to pay $45 more per month with the Piggyback, but that\u2019s all going towards the principal and house interest, instead of being wasted on PMI. <\/p>\n\n\n\n Paying the least per month isn’t always the most important factor. It is also important whether your money is going towards the home or something like interest or PMI. Putting money into these is like flushing it down the drain.<\/p>\n\n\n\n So, what is the best loan to go with? <\/p>\n\n\n\n Let\u2019s fast-forward 5 years and see how much you would\u2019ve paid in Principal, Interest, and PMI with each of these loans:<\/p>\n\n\nHome Savings Option 2: Invest it in the stock market<\/h3>\n\n\n\n
Home Savings Option 3: Open a high-yield savings account<\/h3>\n\n\n\n
Mortgage Options<\/h2>\n\n\n\n
Mortgage Option 1: Put 20% down (or more)<\/h3>\n\n\n\n
Mortgage Option 2: Piggyback Loan (80-10-10) \u2013 10% Down <\/h3>\n\n\n\n
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Mortgage Option 3: Conventional Loan with 10% Down Payment<\/h3>\n\n\n\n
Other Options<\/h3>\n\n\n\n
Which Mortgage Option is Best?<\/h3>\n\n\n\n
Why You Must Avoid PMI<\/h2>\n\n\n\n
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20% Down ($40,000)<\/h3>\n\n\n\n
![\"20%](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/home-savings-1-1024x295.png?strip=all&lossy=1&ssl=1\")
<\/a><\/figure><\/div>\n\n\nPiggyback Loan (80-10-10) – 10% Down ($20,000)<\/h3>\n\n\n\n
![\"20%](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/home-savings-2-1024x295.png?strip=all&lossy=1&ssl=1\")
<\/a><\/figure><\/div>\n\n\n![\"$20,000](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/home-savings-3.png?strip=all&lossy=1&ssl=1\")
<\/a>![\"total](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/home-savings-4.png?strip=all&lossy=1&ssl=1\")
<\/a><\/figure><\/div>\n\n\n10% Down – ($20,000)<\/h3>\n\n\n\n
![\"10%](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/home-savings-5-1024x308.png?strip=all&lossy=1&ssl=1\")
<\/a><\/figure><\/div>\n\n\n![\"total](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/home-savings-6.png?strip=all&lossy=1&ssl=1\")
<\/a><\/figure><\/div>\n\n\nThe Best Mortgage Option Based on the Math<\/h2>\n\n\n\n
![\"math](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2023\/03\/image-19-1024x252.png?strip=all&lossy=1&ssl=1\")
<\/a><\/figure><\/div>\n\n\n![\"wasted](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2023\/03\/image-18.png?strip=all&lossy=1&ssl=1\")
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