The other evening I had a conversation with a Millennial. She explained to me that she wants to save a bigger down payment before purchasing her first home. And she is a good saver, having already put away $10,000 on a modest salary.
So she was surprised when I told her saving more for her down was not the best play.
Positive Stuff About My Young Future Home Buyer Friend
I do want to say that the Millennial I was chatting with at the baseball game is doing all the basics perfectly. She doesn’t have a big car payment – she drives the same set of wheels as she did in college – when she’s not Ubering.
And she is paying off her credit card monthly and managing her entertainment expenses responsibly. And she has a great career going. I was really impressed by all the things she is doing right.
If you are just starting to think about buying a home, check out this Cincinnati blog on defining wealth and cash flow.
Triple Bump In The Road
Imagine driving along and you cross one of those speed bumps, designed to get us to slow down. Its annoying. Now imagine three in a row. Bump bump bump.
Three factors in today’s economy are impacting and changing the dynamic that a bigger down payment is good.
In the Boulder real estate market and Denver housing market you have briskly increasing home values. Nationally there are higher mortgage rates and a changing Fed policy that even President Trump has tweeted about.
- Snowballing home prices
- Broadening home mortgage rates
- Fed policy reversal
Home Prices Increasing. Duh.
Nothing elegant here; its a well established fact home prices along the Front Range are climbing. Even once quiet Colorado Springs is seeing big gains in value. With home prices soaring year over year, an extra thousand or ten thousand down is not much compared with price hikes.
Not every American market has ascending values. But the rest of the country does share the next two!
Interest Rates Rising In USA
Our next culprit is the rate you’ll pay in interest.
The catch 22 here is that home mortgage interest rates are rapidly increasing today. For the average saver, those increases are outpacing modestly weightier down payments.
For someone like my Millennial friend, its actually causing her future mortgage payment to be over and above in the future, not less. And of course, there are all the other mortgage concerns for first time home buyers too.
This likely sounds incorrect. After all, how is it possible to have a bigger down payment and not have a smaller monthly payment. The variable in the equation is the home mortgage interest rate.
That rate has been expanding the last several years. Closer to the Great Recession, rates were in the three’s. Today, rates are closing in on five percent.
This is primarily a result of national policy. The Federal Reserve has steadily been increasing rates in the US the past two years. There are more rate hikes planned for 2019.
Bigger Down Payment Cannot Overcome Federal Reserve Policy
It’s not merely the rate changes impacting home buyers. There is also a fundamental shift in policy at the Federal Reserve. Starting during the Great Recession, the Reserve began buying and holding mortgage backed securities.
This action impacted home mortgage rates, keeping rates artificially low for a really long while. But now, the governing policy is to sell. And we’re talking hundreds of billions of dollars of securities flooding back into the marketplace.
For a buyer like the Millennial I was chatting with, she runs into a double whammy. She’s saving and creating her bigger down payment. But each extra thousand dollars is nothing compared the increase wrought by two trending finance policies of rate increases and more mortgage backed securities.
Less Down Equals Lower Payment
And this brings around the startling reality. That putting less money down today, while rates remain lower, is going to get an average Millennial home buyer a lower monthly payment for the next thirty years.
Its that simple. Get the better rate and enjoy a lower monthly liability.
About The Author
Bob Gordon is an active Director on the local Ohio Wesleyan University Alumni Board. He writes blogs on real estate related topics on a regular basis. Employs college interns throughout the year to give young people an opportunity to have real world experience.
And takes advantage of Colorado’s hiking, skiing and great outdoors. Give me a shout if I can be of service.