Down-Payments: Avoid Speculation

Throughout the course of the ongoing pandemic, many people have seen opportunities for investments left and right. Some have made themselves wealthy, while others were the last ones in before the rug was pulled out from below. When it comes to investing, there are risks, and the biggest risk of all is loss. So, why would take your precious, hard-earned down-payment money and gamble it away? Even with record high home prices, soaring inflation, and endless ways to invest at your fingertips, your down-payment should be separate. In fact, as much as people think that “cash is trash,” your down-payment should be liquid cash inside a savings account for that moment when you need to move quickly to buy. Here is why you should not speculate with your down payments for real estate.

Do Not Be Tempted

In the past few years, we have started to see new generations of homebuyers: Millennials and Gen Z. In fact, Millennials made up the largest demographic in terms of home buyers in 2021. According to the National Association of Realtors (NAR), Millennials born between 1980 and 1989 made up 23% of the home buyers in 2021. Younger Millennials, or those born between 1990 and 1998, made up 14% of new home buyers. So, just under 40% of the buyers who successfully closed on a property in 2021 were Millennials.

Many of these new buyers had the same question in common: how do we save for a down-payment? According to an author of a Bloomberg Opinion piece, Erin Lowry says that her most common financial goal from an Instagram poll was to save for a down-payment on a house. With many Millennials seeming to be easily influenced into buying the next crypto coin or meme stock, the question rings even louder in the back of their minds. Because of all the fin-fluencers and get-rich-quick gurus, many people are beginning to believe they should speculate with their down-payment savings in order to achieve their goals faster.

Why Cash Is King For Down-Payments

So, this raises our biggest question to answer. Should Millennials be saving cash for their down-payment or looking to maximize their money with the “next big thing?” Well, even with home prices soaring to record levels and inflation at 40-year highs, cash is still king in terms of real estate. Down-payments should be held in a cash account, free from access and any pesky get-rich-quick influence. While it may seem prudent to hold cash while watching your buyer power diminish due to inflation, home prices, and mortgage rates, it is important to remain strong. As old school as a fellow Millennial can be, cash is king in a real estate environment. Investments that are purely speculative, NFTs, crypto, meme stocks, all carry more risk than the blue chip investments. In fact, the most blue chip investment of them all is real estate.

Down-Payments According To The Experts

Realtor.com, a key company in making market forecasts, predicts that the U.S. housing market will continue to be strong in 2022. In 2021, Zillow reported that the average buyer had to submit a minimum of two offers before getting one accepted. That may not seem like much, but in the years prior, including 2020, buyers had more control and had less to worry about in terms of being rejected.

Real estate purchases are often times the largest purchase that one will have to make in their lifetime. Being able to put some money down, whether you put down 3.5% or 20%, makes your offer more attractive. However, just because you have some money down does not mean that the house you are looking at is automatically the house for you. The biggest hidden costs in real estate come in the forms of maintenance, taxes, and monthly expenses such as PMI. As a renter, the one hidden benefit is that maintenance is often covered by the landlord.

Why More Down Is Better

With 3% down, a buyer may feel good about their home purchase. However, does putting the minimum down for your loan type really matter if you are “house poor?” For those who do not know what that expression means, Rocket Mortgage has a great definition on their website. Avoiding this phenomenon is very easy, and putting more money down is one of the best ways. When a lender sees you putting more of your own money in, they are likely to give you more favorable rates. Not to mention, once you reach 20% equity in your home, your PMI payments can be terminated. So, putting 20% down might not be such a bad idea after all.