Amassing a 20 percent down payment — or any sizable downpayment, for that matter — is difficult for most people. Saving money in general is difficult for most.

While a large downpayment can convey benefits (smaller loan balance, lower interest cost over time, no mortgage insurance premiums) the reality is that most borrowers are chasing the ever-moving goalposts, and the larger the percentage, the harder it can be to reach them.

By way of example, lets say that homes in your market are selling for $200,000. We’ll compare two borrowers — one who waits to accumulate a 20 percent down payment and one who buys with just 5 percent down.

A wannabe homebuyer starts to save money to amass a down payment. A goal of 20 percent is set, so the borrower needs to save up $40,000 in cash.

Even with diligent savings, accumulating $40,000 in cash will take some time. For our purposes, let’s say this takes two years. Great! Now they’re ready to look for a home.  But wait!  Home prices have risen by 5 percent in the first year (to $210,000) and have risen another 5 percent the second year, so the $200,000 homes they hoped to buy are now selling for $220,500. To maintain that 20 percent down payment figure, the potential homebuyer will have to bank another $4,100. This could delay purchasing again for a while, another couple of months at least.

Now consider someone who is only looking to make a minimum down payment — just to get a foot in the door, so to speak. While 3 percent down options are available, they shoot for 5 percent. As above, homes are selling for $200,000 and making a 5 percent down payment means amassing $10,000 in cash. In the same example of saving as above, this potential borrower was saving $1,666.66 per month; this means only six months of cash accumulation before they can move into the market to buy a home. As above, prices have moved upward a bit… but over this 6 month period, perhaps just 2.5 percent. This means they need additional savings of only $250 to cover the difference — or less than one week’s additional cash accumulation.

Let’s look at some additional figures, too. The buyer who waited to buy purchases a home for $220,500, and with 20 percent down, the home has a mortgage of $176,400 and no Private Mortgage Insurance (PMI). At a 4 percent rate, and with a 30-year term, this translates into a principal and interest payment of $842.16 per month.

The buyer who did not wait to buy purchases a home for $205,000 (that’s $200,000 appreciated by 2.5 percent over a six-month period). With 5 percent down, this leaves a mortgage amount of $194,750; with a 4 percent interest rate and a 30-year term as above, this would see a principal and interest payment of $929.77 plus an additional PMI payment of $95.75 per month for a borrower with very good credit, for a total payment of $1,025.52 per month.

So the borrower who bought sooner with a smaller down payment has higher costs. However, there are some compensating factors to consider.

To start with, the borrower who bought sooner has experienced some beneficial price inflation. Over the 18 month differential (when compared against the borrower who waited) the original purchase price of $205,000 has now moved up to a value of $220,631.25; coupled this with 18 months of paying down the loan balance ($189,552.34 after 18 months), this borrower’s equity stake has risen from 5 percent to about 14 percent (expanding from an original $5,250 to a current $31,078.91). It may only be a few additional months before they are eligible to cancel the PMI (generally this is a minimum of 24 months must pass before the lender will consider cancellation). When this occurs, their monthly payment will drop back to just $929.77, so their initially substantially higher costs end up only about $87 per month more than the buyer who waited. (We might recommend using the former $95.75 PMI payment as a monthly prepayment, which would produce tremendous additional interest savings over time).

Buying a home with a smaller down payment does have its costs, as demonstrated above. All other things being equal, a higher loan amount will carry higher monthly payments and total interest costs than will a smaller loan. The higher loan amount means that the borrower with the smaller down payment needs to have higher income to qualify, especially when PMI costs are considered, as they will be. That said, buying sooner means that the process of equity building can start sooner, and this is especially the case if home prices are rising strongly, as they have been in many markets for the last few years.

Of course, waiting to buy can have its costs, too. The opportunism provided by a smaller down payment means that a potential homebuyer can move more quickly to take advantage when a desirable property comes on the market; the borrower waiting for an arbitrarily higher down payment may miss this chance. If we consider these homebuyers to be first-time buyers, looking for starter homes already in short supply, it may be that the buyer who waits may have little to buy — or could possibly even be paying a premium to the buyer who bought sooner and may already be selling and moving up.

One additional caveat — wildcard, actually — is interest rates. While low and fairly stable in recent years, there is no certainty or guaranty that they will be the same in two years as they are today; in fact, it’s a good bet that they will be different. How much different is unknown, but even if the borrower who waited sees rates of only a half percentage point higher, the cost difference between the choices narrows considerably (especially after the PMI cost for the 5 percent down borrower is eliminated).

Pricing Your Home Too High

• By far, the worst home selling mistake a seller can make is hanging the wrong price tag on a home. If the home is priced too high, buyers won’t look at it. If it’s priced too low, sellers worry that they’ll give away profits.
• If the home is overpriced, buyers might submit lowball offers, which tend to result in an immediate offer rejection. These extremely low offers tend to infuriate and insult sellers.

Home Is in Bad Condition

• Getting your house ready for market goes beyond making the beds and washing dirty dishes. Although I’ve seen plenty of homes with toys scattered throughout and dishes piled in the sink; buyers can’t get out of those homes fast enough.
• Dressing your home for showings is called staging a home. Think of the process like arranging flowers in an attractive vase. If you or your agent lack the vision or ability to stage, consider hiring a professional home stager.

Trying to sell it yourself

• Statistics don’t lie.  89% of all “For Sale Buy Owner” attempts end up calling a Realtor for help.  Why?  Because they don’t have requisite expertise, knowledge or systems in place to properly market, advertise, engage or engage with a buyer.  Not to mention no experience with setting the right price, negotiating, figuring out all the paperwork, staying in compliance with local laws, etc.  FSBO homes usually are people that don’t know what they are doing and can lose big in the end.  Walking over dollars just to save dimes is never the best choice.

Home Is Marketed Wrong

• Whenever I see a badly shot photograph in MLS, and perhaps it’s the only photo, I want to shake the agent and scream, “What are you thinking?” But agents and sellers make plenty of marketing mistakes.
• Before selling your home you still need to examine your local and neighboring communities housing market statistics. If you live in a high-demanded area for tourists, executives or that has prime real estate value in terms of worth then your outlook could be better than a neighboring community that has 1/3 of their properties on the market, and has for the last 6 months.

Not disclosing problems or past history of your home

When selling your home don’t try to keep the home’s past history a secret. A home inspector could locate the problem(s) later into negotiations or the past history could affect the safety of the future homeowners. Be honest and take care of all repairs before attempting to sell your home.  The buyer could always sue you as well if you kept pertinent information to yourself.  Honestly is always the best policy.

Ignoring your Realtor’s advice.

If you’ve chosen correctly, your Realtor should be the one person you really listen to when it comes to strategies for selling your home quickly and for the best price. If they tell you that the home needs to be de-cluttered or staged, listen. Buyers react negatively to homes that need repairs or are messy.

1.  The advice your uncle gave you is not always the best

Be careful about following the guidance of family and friends who have limited experience in the process.  Having bought a home once every 5+ years does not qualify them as an expert.  Your agent does this every day so perhaps their advice is more timely and knowledgeable?  What other professional service would you allow family and friends to give you?  Legal, medical, business advice?  Likely not … treat this the same way.

2. Take the time to “sniff” out any issues with the property

Look and smell for mold as well as animal-related odors. Knock on walls to see if they sound hollow. Open the dryer and the dishwasher – you never know if pests are living in there. Does the toilet flush properly? Does the heating/air-conditioning work? Is the flue functioning above the fireplace? Is the water pressure okay?

3. Work with experienced professionals

Hire the most thorough, licensed home inspector you can find to pinpoint any issues that could potentially end up becoming costly repairs.  Your agent can help you find a great professional.

4. Use your head, not your heart

Don’t be afraid to walk away from a bad deal. There will be other properties, maybe even better ones. Remember that this is a financial transaction and that your terms must be met.  In order to get your best deal you must be willing to walk away.

5. Negotiate as much as you can … but be careful

Your agent will be doing the negotiating for you, so make sure you tell them what it is you are willing to concede and what you aren’t.  Just remember, there is a fine line between being a hard negotiator and being unreasonable.  Pushing to hard can (and does) sink deals with sellers.  Just be aware … and listen to your agent’s advice

6. Gardens and yards are work

Almost everyone likes the idea of having a garden, but if you’re not used to maintaining one, you might want to think twice about whether you want to spend your weekends weeding and mowing the lawn.

7. Buy property you can afford now, not later

Even if you’re pretty certain that you’ll be earning more in a year or two, you might also find that circumstances increase the other expenses in your life. Children, schools, new cars and travel plans are substantial costs. Make sure there will be room in your budget for you to live the life you want.

8. The search can take longer than you think

Don’t operate on someone else’s timeline and don’t make commitments that will make things challenging if your property hunt takes a few months longer than you anticipated. If you’re renting, stay on a month-to-month agreement so that you are able to move without penalty.

**Ryan Wheeler is an expert real estate agent and military veteran serving buyers and sellers of homes in the Shreveport Bossier City area.  Connect With Me Here