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May 18, 2022

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‘With rates going up, I’m worried I’ll never be able to afford a home’: I only have $15,000 saved for a down payment. Should I wait before buying?

Dear MarketWatch,

I’m looking into FHA loans and first-time home-buyer programs. I have a fair credit rating of about 670. A few programs I have researched suggest I’ll only need to put about $15,000 down.

With rates going up, I’m worried I’ll never be able to afford a home if I don’t pull the trigger now. I wanted to wait to get more of a down payment other than the $15,000 I have saved, but I don’t know if it’s best to just have a larger down payment or take the lower interest rate now? Any advice would be appreciated.

Sincerely,

First-Time Fears

‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at TheBigMove@marketwatch.com.

Dear First-Time,

Your concerns are valid. The Federal Reserve on Wednesday hiked the benchmark interest rate by 50 basis points. Fed chair Jerome Powell said the central bank was not likely to hike its benchmark interest rate by 75 basis points at its next meeting, all but promising consecutive 50 basis rate hikes.

“We need to really see that our expectation is being fulfilled, that inflation in fact is under control and starting to come down, but it’s not like we would stop, we would just go back to 25 basis point increases,” he said.

And so back to your question. The Federal Housing Administration’s loan program — along with the VA loan program and organizations that provide assistance to first-time buyers — are certainly vital lifelines. For many, without this support, owning a home would never be possible.

There’s a common misconception that you need to make a 20% down payment to be able to buy a home. As you’ve found, the FHA only requires 3.5% down, and other programs will grant low- and moderate-income households the funds to make up the difference if they cannot save even that amount on their own.

But this aid comes with a catch. With FHA loans, borrowers must pay mortgage insurance. There’s an upfront premium, which costs 1.75% of the loan amount, that must be paid at closing, and then there’s an ongoing monthly premium that must be paid for anywhere from 11 years to the full life of the loan. The ongoing premium varies in size from 0.45% to 1.05% depending on the loan-to-value ratio on the mortgage, according to LendingTree, and is added to the monthly mortgage payment.

The down payment is just one part of the equation when it comes to affording a home. A larger down payment means the loan is smaller — and that reduces how much you’ll pay in interest over time as well as the size of the monthly payment. Some lenders even will reduce the interest rate if a buyer makes a larger down payment.

Making a larger down payment also offers some protection in instances where home prices fall. During the last housing crisis, many families bought homes or refinanced with zero-down loans, meaning they had no equity built up in their homes. And so when home prices fell, they found themselves owing more than the home was worth.

When many of those families found themselves struggling to keep up with their monthly mortgage payments they couldn’t rely on selling their home to cut their losses, since they would still owe money to the mortgage company. Making a bigger down payment provides a cushion for borrowers against such an unfortunate scenario.

Of course, putting more money down can reduce a household’s savings, leaving less money for emergencies or home maintenance in the future. So it’s not a cut-and-dry situation. And you wouldn’t want to find yourself in a situation where an unexpected hospitalization or job loss made it impossible to keep up with your monthly payments, putting you at risk of losing your home.

Instead of worrying about the down payment and rushing to beat rising rates, I would focus on what you can afford in terms of a monthly loan payment. Keep in mind that owning a home comes with other expenses you’re on the hook for — utilities, taxes and home repairs to name a few.

Figure out what you can afford to pay each month, and then use a mortgage calculator to determine the price of the home you could purchase to maintain that monthly payment. Depending on what the prevailing home prices are in your area, that down payment may be sufficient or not.

For instance, if you could afford to pay more than $2,500 a month, you could manage to buy a $400,000 home with just a $15,000 down payment. Whereas, your monthly payment would be less than $1,400 if the home only cost $200,000, with that same down payment.

It can be tricky to determine what’s affordable — especially in a competitive market like this one where it’s easy to get in over your head when most homes are seeing bidding wars. I would suggest you talk to a housing counselor or a financial adviser to help you figure out what the best course of action is for you. I know you may be sad to miss out on a lower interest rate, but with a purchase as large as this you don’t want to rush things.

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