In consumer finance conversations, it's not uncommon to hear jokes or stereotypes about young adults and their perceived inability to save money or prioritize their finances. Some chide millennials, the youngest age group of adults in the Western world, for preferring to spend lavishly on dining and entertainment without giving much thought to long-term investments like homeownership. But while these assumptions make for some comedic fodder, they don't appear to jibe with reality. In fact, as a group, U.S. homeowners are getting younger and making smart decisions on down payment savings, even in a market that's not always tilted in their favor.
Some economists and writers have speculated that the modern phenomenon of high student loan debt and wage stagnation would make down payments unaffordable and depress homeownership rates for young adults. But studies including a recent one from NerdWallet poke holes in this theory: Over the next five years, millennials are poised to become the biggest age group of all U.S. homeowners, based on a poll of more than 2,000 adults. Among the findings on the typical modern American homebuyer:
- Two in five Americans have either purchased a home in the last five years, or plan to do so in the next five years. Forty-eight percent of millennials had a home purchase allotted in their five-year plan, according to the poll.
- 44 percent of survey participants said a lack of down payment savings is the primary factor preventing them from buying.
- 79 percent of Americans hoping to purchase a home in the next five years said they would be willing to make sacrifices, including delaying marriage or having children, to afford a down payment.
Accumulating enough cash to satisfy a mortgage lender's terms for a down payment is perhaps the biggest single hurdle most prospective homebuyers face, particularly younger adults who haven't had time to accrue significant savings yet. But there are some common misconceptions about down payments muddying the waters in this discussion.
Do you really need 20 percent down?
According to the NerdWallet survey, 44 percent of U.S. adults believed that a 20 percent down payment is a non-negotiable requirement for a mortgage or home purchase. However, it's becoming much less common for modern homebuyers to put down even half that amount. A study from the National Association of Realtors found that at least 70 percent of non-cash home sales made by first-time buyers included down payment terms of less than 20 percent. Among all buyers, more than half paid less than the oft-cited 20 percent benchmark.
In fact, NAR researchers found that 60 percent of first-time homebuyers put down 6 percent or less to purchase their homes. Despite these findings, most younger Americans continue to assume that a 20 percent down payment in mandatory, and remain unaware of programs that can reduce it.
Saving up for the down payment
Still, a cash payment of even 6 percent of a home's purchase price can amount to several thousands of dollars, a significant expense for most of us. Nerdwallet found that young adults who bought a home in the last five years took around 3.75 years on average to save up for their down payment. Based on federal data on personal savings rates, which showed that the average millennial saves around $7,600 in cash per year, it would take even longer (4.2 years) to come up with a 10 percent down payment on a roughly average $323,000 home. Many also rely on gifts from family members to boost savings even further, or they might put wedding plans or childbirth on hold to maximize savings.
Why you should still consider 20 percent
There are a number of federal and local government programs that can reduce down payments to as low as 3 percent in some cases. While that might sound like a no-brainer, there are a few reasons why homebuyers might consider shooting for that 20 percent mark, if they can.
- Buyers who put 20 percent down can expect more favorable loan terms, including a lower interest rate, since it will reduce risk from the lender's perspective.
- While your base interest rate might be lower, you will also not need to pay for private mortgage insurance by putting 20 percent down, reducing monthly payments even more.
- A down payment represents an equity stake in your home. The more equity you have as soon as you close the deal, the more protected you are from market fluctuations, and you'll be that much closer to paying off the mortgage in full.
There are many more considerations that go into the decision to seek a lower upfront payment or keep saving. Low down payment loans might also require more hoops to jump through at closing and could take longer to process. In the end, you will want to carefully weigh your options for saving toward a down payment, and reach out to the best lender who you can work with to make the situation as seamless and affordable as possible.
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