Housing is our largest expense. While we tend to talk about saving money on smaller expenses, like coffee or cable, we don’t want to be penny wise and pound foolish. Here’s how I saved over $100,000 on my home. These tips can help those buying a home, as well as current homeowners who still want to save money.
Supporting a family of 5 on one middle-class income has not been easy. But by prioritizing our goals and cutting back on everything else, we’ve build a good life and a stable home for our family. Here’s how we decided how much money to put towards a down payment for our house, how we got rid of principle mortgage insurance, and are now on track to pay off our 30 year mortgage in only 7 years.
What the Experts Say
Experts say to save 20% for a down payment on a house. That’s in addition to closing costs, moving expenses, fees for turning on utilities, and a healthy emergency fund to pay for the unexpected things that can (and will) need repair. Not to mention the many other things you will need for your house (e.g., garbage can, curtains, lawn mower).
My lender said I qualified to put as little as 5% down. I was afraid that if I put only 5% down, my monthly payments would be higher, plus I would be paying over $100 more each month for over a decade in private mortgage insurance (PMI). Additionally, it would take years longer to build up equity in my home, which would be important if for any reason I would need to sell my home.
But 20% just wasn’t realistic for me at the time. We were (and still are) a one-income family. I had just started working after 15 years of college and post-graduate training, and had spent every cent I had to pay off our vehicles and my student loans.
Related article: How 5 People Live Off 1 Income
Why Be Debt-Free Before Buying a Home
Being debt-free before buying a house was a great move for us. Not only did it improve our debt-to-credit ratio (allowing for a better interest rate), but it also freed up enough of our take-home pay so that we didn’t struggle to make our monthly mortgage payments.
But it also meant that we didn’t have enough money to put 20% down when buying a home. After 15 years of being married, having lived in 7 different apartments, and having a child who was about to start kindergarten (not to mention that our apartment was sold to foreign investors who were going to increase the rent), we were ready to settle down with a house of our own.
How Much to Save for a Down Payment
To find the sweet-spot for me in how much to put down on a home, I considered :
- How much I could realistically save while also having money left for emergencies and closing costs.
- What my monthly mortgage payment would be (including principle, interest, escrow for taxes and insurance, and community development debt (CDD), and home owners association (HOA) costs). To avoid being house-poor and to allow me to save for my other life goals, it was important that my monthly payment be <25% of my income.
Putting 10% down was a compromise that allowed me to do just that.
My current monthly mortgage is 23% of my net (i.e., take-home) pay and 18% of my gross (i.e., pre-tax) income.
By being debt-free except for my mortgage and keeping my monthly housing costs low, I was able to make additional payments toward the principle of my mortgage. By paying extra each month, I built up more equity in my home. Once the balance of your loan is 80% of the home’s value, homeowners can submit paperwork to request to have PMI removed. I was able to do this after only 24 months!
Getting rid of the PMI saved me over $100 each month. Without making additional payments, we would have been paying PMI every month for over a decade!
Guaranteed Savings of over $100,000
After the PMI was gone, I continued to make additional payments each month. Using a free mortgage calculator, I saw how much I was able to save in interest over the life of my loan. This got me excited! Each time I got a raise at work, I would put more toward my monthly mortgage payments. I also continued to cut items from my budget, and put those savings into my mortgage as well.
Related article: Things I Don’t Buy Anymore
Currently, I am on track to pay off my 30 year mortgage in 7 years, resulting in a guaranteed savings of over $100,000 in interest.
Why Not Invest the Money Rather Than Pay Off Mortgage
Some people suggest investing their money rather than paying off their mortgage. While this is a tempting thought, I decided against this route for a number of reasons.
- My family needs a place to live. Many people lost their homes during the recession, and I want to learn from that heartbreaking lesson. If I become unable to work or lose my job, I want to know that my kids will still have a roof over their heads.
- Investment returns are likely, but they are not guaranteed. The stock market’s average return of 7% is twice as high as the 3.5% interest I am paying in mortgage interest. However, investments are a possible return – it is also possible to lose money. The amount saved on my mortgage is a guaranteed savings.
- As my primary residence, there are legal protections for my home that would not apply to investments. For instance, if there were a litigation and someone were to come after my assets, they would not have the same access to my home as they would toward my investments (check the laws in your state).
I always though that I would do the “right thing” and follow the experts’ advice to put 20% down when I was buying my home. By putting 10% down, then making extra payments toward the principle to increase my equity, I was able to have an affordable monthly payment and still pay off the PMI.
Once I started making additional payments, I saw how much I was saving in interest. This was a huge motivator to keep up the momentum. Now I am on track to pay off my 30 year mortgage within 7 years of purchasing my home. Where else can a middle-class family get a guaranteed return of $100,000? Plus, we will soon be able to say that we actually own our home!
What tips do you have for saving money buying a home?