Saving More vs. Buying Now

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Congratulations! You’ve worked hard and saved enough for the required 5% down payment on your first house. You have a decision to make as you prepare to open the champagne: should I buy now or save more money for a greater down payment?

When looking for a home, the size of your down payment is crucial since it affects your purchase price and monthly budget as well as your ability to avoid paying thousands of dollars in interest. Homebuyers must also decide if they want to save enough money to avoid having to pay mortgage default insurance, which is required for purchases with less than 20% down.

We’re here to outline the distinctions between using your savings as a down payment and saving for a larger down payment.

Putting More Toward a Down Payment

It’s worth thinking about if you can save more money each month and put down a bigger down payment in a few years. Putting more money down will not only lower your monthly principle and interest payment, but it will also result in interest savings of thousands of dollars over the course of your mortgage.

You’ll also be eligible for a traditional mortgage and be able to avoid expensive mortgage default insurance if you put at least 20% down. Since you pose less of a default risk by making a significant down payment, lenders are likely to offer you cheaper interest rates.

A bigger down payment is a decent first step if all you can afford is a tiny one-bedroom condo but you’d rather purchase a detached house. A bigger down payment also acts as a safety net in the event of a housing correction.

For instance, if your home’s current valuation is $950,000 and there is a 15% housing correction, your home would be worth only $807,500. You would still have $47,500 in equity with a down payment of $190,000 (20%) ($807,500 – $760,000 = $47,000). However, your mortgage would be $95,000 underwater if you just put down 5% of the purchase price, or $47,500 ($807,500 – $902,500 = -$95,000.)

Purchase Now

Saving more money for a down payment might seem like a smart idea, but not everyone can do it. Start by looking at your monthly spending plan. How much money can you put aside each month, and when will you be able to accomplish your new savings target? You could invest $6,000 a year toward your down payment, for instance, if you can save an extra $500 per month.

Being priced out of the market (occurs when home prices increase faster than your down payment) is a serious problem in more expensive areas like Toronto and Vancouver. For instance, if home prices increase by 10% next year and you’re pre-qualified for a $950,000 house, you’ll need to save at least $95,000 to be able to purchase the same home. Can you actually do that?

Are you truly willing to forego your daily excursions to Starbucks and yearly trips to Mexico in order to save more money for a larger down payment? However, purchasing now makes sense if your lender offers reasonable prepayment options. If you receive a raise at work or receive additional income, you may always make lump sum payments or increase your mortgage payments.

Which one suits you better?

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