You know you could be saving for a home, but how much do you need? When should you start? Learn how to set an appropriate goal and strategic plan to put down the most tactical down payment on the home of your dreams.
We specialize in jumbo home loans, you know, the ones that make it possible for you to live comfortably in the dream home you’ve been pinning on Pinterest for the past few months? Yep, that’s us!
So, you might be wondering, how much do I need to put down? Let us explain it all in a simple three step process that you can implement yourself to help optimize the down payment for your million-dollar home!
Steps to Getting the Down Payment for a Million-Dollar Property
- Understand Down Payments
- Set Strategic Goals
- Plan for Special Considerations
1. Down Payments
Whether you’re purchasing a primary residence or an investment property, it’s imperative you understand down payments before signing a contract. The amount of down payment on any given home will change your interest rate; more money down means that you have more skin in the game which often results in a better rate.
Additionally, higher priced homes may require larger down payments. Thus, the more equity you invest in the home, the less risk you pose for the lender and the lower your interest rate is likely to be.
However, this is not an end all be all. There are certain scenarios in which it would benefit you to take a higher loan amount and keep more money in the bank. Before discussing those specific considerations, let’s set strategic goals for how much you need to save.
2. Set Strategic Goals
Generally, it is common to aim for 20% savings of the purchase price for the down payment. However, if you value a quicker path to owning your million-dollar house, you may invest as little as 5% by putting down $50,000.
This may not always be the best option in terms of your total monthly payment obligations, interest rate paid on your loan, and the additional cost of mortgage insurance. But if speed is most important, this down payment goal is likely to do the trick. However, a lower down payment does come with additional risk related to increased overall debt load.
Conversely, you could wait until you’ve saved a higher percentage of the purchase price, say 20% of a million-dollar home or $200,000. This scenario will carry a lower interest rate and no additional monthly mortgage insurance, saving you hundreds of dollars a month.
Although this is a great start for you to build home equity, with consideration to your unique situation and values, there are additional items to account for during the planning process.
3. Plan for Special Considerations
Knowing how down payments work and what amount you aim to save, let’s consider strategically where the money might come from. How much money you have saved will be a major factor in determining how much to put down.
We’re not just talking about your money market savings account but rather all accounts including your 401k, investment accounts, etc. Consider, are there any penalties for taking funds out of these accounts? And what losses might you experience? Some assets may be earning more invested as-is than they would lower your costs in mortgage payments.
Therefore, you must evaluate the earnings on your assets versus the interest rate on your mortgage. For example, if you have $100,000 in a brokerage account earning 6%, rather than liquidating these funds you may choose to put less down and borrow an extra $100,000 at 5% against your home.
In doing so, you are positive $1,000 in annual cashflow (ignoring the tax write-off on your mortgage interest, which makes this more positive). Conversely, if you liquidate the $100,000 to lower your loan amount, you might be giving up profit. Depending on the interest rate of your loan, you may benefit from keeping your assets safely in their respective savings accounts while you enjoy a low home loan interest rate rather than seeking higher rates in other loans or penalties.
You may also want to consider your income trend moving forward. Do you expect your income to increase or decrease? If you intend to make more over time, a higher monthly payment may be more beneficial than depleting your savings. Conversely, if you expect your income to stay constant or even decline, a lower monthly payment might be more helpful down the road and you may want to put more money down upfront.
Lastly, consider how much will be left over once you’ve closed your loan. What is the likelihood that you will deplete these savings and spend it? Set a safety net for yourself, an amount you need to preserve in savings, that suits your level of comfort that you’d like to maintain. Remember, it is not recommended to use all your assets for a down payment on a home.
For some individuals with a high propensity to spend, putting a lower down payment on a home carries additional risk in the event of property value contractions; in this case, you may end up in a situation where you owe more than the property than it is worth in a sale, particularly after broker fees.
Choosing the Right Down Payment
Now that you understand how down payments work, have set strategic goals, and have planned for special considerations, you’re ready to start searching for the home of your dreams. Remember these three simple steps to getting the down payment for your million-dollar property: understand down payments, set strategic goals, and plan for special considerations.
Start now by deciding what’s most important – moving in 1-2 years or saving money long term? Set your own down payment goals and work backwards using your unique timeline. Plan based on much you need to earn each month to afford the home of your dreams.
Lastly, what considerations might you need to weigh? Compare the income your assets are earning to the expected mortgage rate before setting your goals and organizing your finances to apply for a loan in the future.
Sound like too much work? You don’t have to prepare alone! Our advisors are here to help at any stage (and any loan size) of your home ownership journey; Additionally, we’d love to share with you the power of our cutting-edge technology that guides you through all down payment options through a sophisticated analysis of the net worth implications of varying loan options based on your tax rate and time in the home! You see, with us, it’s fast, transparent and seamless!