American Homebuyers Struggle to Save for the Down Payment

If homebuyers want to get the best rate on a mortgage, they must first come up with a 20% down payment. A new study finds that this down payment averages 2/3 of a family’s annual income.

According to online real estate firm Zillow, a buyer must scrape together $38,500 in cash in order to buy a median-priced home for $192,500 – if that buyer wants to qualify and get the best terms on a mortgage.

While $38,500 is a lot of money, it’s nothing compared to what buyers need in some of the pricier housing markets.

For instance, in San Jose, where the median income is $105,455, a down payment on the median $961,600 home is $192,320, Zillow finds.

Among large housing markets, buyers in the San Jose, San Francisco and Los Angeles metros must come up with the largest percentage of their income to buy a home – 182 percent of the average annual income to put 20 percent down on the median home.

It Might Get Worse

Mortgage interest rates are expected to rise in 2017. In fact, they rose for two months going into 2017. a This makes having a solid down payment will become increasingly important

As Zillow points out, it is possible to put down as little as 3.5 percent on a home. The trade-off is a higher interest rate and costly private mortgage insurance.

A better interest rate can translate to thousands of dollars over time; on a $200,000 loan, lowering the interest rate by half a percentage point will save $20,000 over the lifetime of the loan.

“Saving enough cash for a down payment is a major barrier to homeownership, especially in expensive markets, where a 20 percent down payment can cost nearly $200,000,” said Zillow Chief Marketing Officer Jeremy Wacksman. “While it’s possible to buy a house with a smaller down payment, 20 percent ensures the best rates. As important as it is to find a monthly payment you can afford, some buyers’ budgets will come down to the amount of cash they can bring to the table.”

This conundrum has already kept many would-be first-time homebuyers out of the market. While they could get into some kind of deal, the long-term financials just don’t make sense.

In the meantime, house prices continue to rise – as do mortgage rates. Things won’t be getting any easier, any time soon.

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