How to Save for the Down Payment on Your First Home

How millennials spend and save their money has been a frequent point of debate, not just among those born between 1985 and 2000, but with their baby boomer parents, too. Who can forget when, just last year, 35-year-old developer and Australian millionaire Tim Gurner called out millennials for “buying smashed avocados for 19 bucks and four coffees at $4 each” instead of saving for their first home.

Setting aside other contributing factors like crippling student debt and stagnant wages, we spoke to Eric Roberge, certified financial planner and founder of Beyond Your Hammock, about some other ways homeownership may be in reach for millennials, while keeping the avocado toast on the table.

You don’t necessarily have to put down 20 percent

The Greater Boston real estate market is unique - New York City, San Francisco and Los Angeles are similarly pricey.

“Some of the down payments around here could buy you a whole house somewhere else,” says Eric Roberge. “It’s a big deal, and people have to understand that the situation here is just different. You can’t compare your situation to your friend’s who lives in Montana.”

But Roberge also argues that potential homebuyers shouldn’t feel absolutely required to put down 20 percent in the down payment.

“A lot of people think they have to put 20 percent down, or they can’t possibly pay private mortgage insurance (PMI) because it’s irresponsible,” says Roberge. “Needing PMI should not be the reason you choose not to buy a home.”

There are two ways that you can buy a home when putting less than 20 percent down: Paying for private mortgage insurance (PMI) or securing a second loan. But, says Roberge, if you can’t afford 20 percent, “we need to make sure we understand why.”

If the issue is that you have the money, and some to allocate to a down payment, but other funds need to go toward student loans or saving for retirement or another competing goal, then you can figure out if PMI might make sense for you. Interest rates are still near historic lows, so if you know you’re going to buy, buying now at a lower interest rate might make more sense than saving for another year and being forced to pay a higher interest rate down the road. However, if you’re buying because you have a kind of “artificial urgency” to buy, then think twice, says Roberge.

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Think about why you’re buying

When it comes down to it, all of these financial decisions are about choice, says Roberge.

“If we’re lucky, healthy and have a good job, there are some choices we have to make about our spending, and that’s ok. We can’t necessarily achieve all our financial goals all at once. If you want to buy a house, why do you want it? If it’s because you’ve been told you’re wasting your money on rent or because it seems like a good investment, I say, you should start over. Those aren’t great leading reasons to buy a home.”

If you look at how much you’re paying in rent versus how much you’d pay to buy a house, it may look like a similar number, says Roberge. But, paying rent will be the most you’ll pay for housing on a monthly basis, whereas your mortgage is the least amount you’ll pay. There are pop-up expenses you have to be financially prepared for.

“It comes down to figuring out what you value,” says Roberge. If you’re around “millennial” age, you might be getting advice from parents to buy a home, or you might feel you’re at “that age,” but in reality, you career hasn’t necessarily settled.

“In two years, you might be moving across the country for a new job. But, if you buy a home, you’re kind of locked in. You could sell, but it’s a risky bet if you’re leaving in two years to buy a home. You want to understand what your next five years, minimum, will look like and where that might put you from a geographic standpoint.”

How to save for the down payment you are going to put down

Once you’ve decided that buying a home is the right decision for you - whether it’s for investment purposes, to house your growing family or any other reason, saving for the down payment is a simple math problem, Roberge says. First, you want to determine exactly how much you can afford. Once you’ve determined your price range, you’ll need to determine how much you’d like to put down. If you’re considering buying a $500,000 home and you want to put down 20 percent, that’s $100,000 you’d put down as a down payment.

If you’re hoping to save that in the next two years, you’ll need to save $50,000 each year, which is $4,166 saved per month. That’s probably not doable for most people. So, maybe you wait three years, or you decide you’ll put down less than 20 percent. But, you need to figure out what your hypothetical down payment amount will be and how much you have to save to get to that number by the time you want to buy.

And, while some advisers talk about investing the money you’re saving for a down payment, Roberge doesn’t recommend that.

“The last thing you want to do is risk not having the money when you need it. I think it’s a better idea, if you’re saving for one to three years, to put the money in a high-yield savings account with a 1.5 or 2 percent interest rate.”

Overall, he says, don’t worry about the incremental amount of interest you can get out of the money, because it’s going to be a small amount regardless. In the most aggressive case, he would recommend a short-term bond index fund, but that’s it.

Costs outside of the down payment

People often focus solely on the down payment, and don’t necessarily think of the closing costs, title insurance, inspections, attorney fees, etc.

“You should try to get a good idea beforehand, if you’re working with the right mortgage company, of what those costs will look like,” says Roberge.

Overall, it comes down to understanding what you are likely to do, financially, and saving for that. So if you’re likely to grab that avocado toast every once in a while, that’s ok. Just make sure you’ve adjusted your plans accordingly.

Photo via Sarah McCoy @storyandsoilcoffee