Best Tips for Millennial Home-buyers
by Ryan Smith - Redfin.com on Nov 19, 2019
Are you a millennial thinking about settling down and buying your first home? Saving for the 20% down payment can be overwhelming – for many of us, it’s tough to know where to begin! To help ease the burden, we rounded up the financial experts to weigh in with their best tips for millennial homebuyers. From long-term investment strategies to day-to-day saving tips, whether you’re in or , here are the best ways to inch toward your first home straight from the experts that know best.
: If saving for a down payment on a home, set a budget and save 20 – 25% of your pay, put it in a separate account that you will not raid for other expenses such as a savings account or money market account at an out of town institution. If you are hoping to purchase this house within 18 months invest in a mutual fund or stock as the market may take a downturn and your funds may reduce when needed.
In most places, a 20% down payment is well over $100,000, and simply cutting back on spending and saving the difference isn’t a viable strategy for most people. Instead, look to invest your month-to-month savings in quality stocks that pay high dividends over 7% and have a 12-36 month growth projection.
Automate your saving. Figure out how much you need to save each month to reach your down payment goal, then set up an automatic monthly transfer from your bank account to an account earmarked for the down payment. This removes willpower from the process and makes it much more likely that you’ll stay the course with your saving plan.
Change your mindset first. Realize that every one of your hard-earned dollars will either start working for you (when you save it) or it will end up working for someone else (like the shareholders of the auto or clothing company, the restaurant owners, etc). Once you remember that, it will become second-nature to look for savings opportunities everywhere.
Discovering what you need to stay motivated during the savings process is the biggest proponent to successfully funding your down payment. We recommend using a financial planning tool that provides you daily updates, alerts, and progress reports, like our Elevation 360 program, which offers you a personal website and acts as a visual reminder of where you are on the path to your goal.
The biggest piece of advice I give to millennial homebuyers is creating systematic savings in a money market account outside their normal saving and checking account. By having auto savings each week and/or month it creates discipline and behavior momentum in watching a single account grow towards achieving their goal. There is no need to have the added risk of investing in stocks or bonds.
Plan beyond the closing: Identify the expenses associated with home-ownership that are beyond the down-payment such as closing costs (approximately $5,000-$15,000), funds needed to furnish and decorate, and additional savings needed for emergencies or repairs (also often required by the lender for mortgage approval). In addition to the down-payment, I recommend a minimum of 3-6 months set aside for living expenses. Traditionally, 20% cash down-payment avoids PMI (Private Mortgage Insurance). PMI is a cost passed onto home-owners who are unable to put 20% cash down, and typically ranges from 0.5% – 1.0% (so $5,000/yr for a $500,000 mortgage). As an alternative, a piggyback loan or 80/10/10 loan allows a borrower to take taking two loans simultaneously: one for 80% of the mortgage and the other to provide cash for the 20% down-payment, which avoids PMI.
If you are healthy, consider a high deductible medical plan, and take the savings and invest towards your down payment (or consider opening a Health Savings Account or Roth IRA). In addition, money from a Roth IRA can be withdrawn penalty-free for a down payment for a first home up to $10,000.
Evaluate and manage your present debt (to include student loans and credit card, etc.,) and consider debt consolidation in advance of entering the home buying market. Work with professionals such as debt managers or financial advisors to help prepare you for all the financial challenges and opportunities of home ownership.
Cady North, CFP®, North Financial Advisors: Beef up your down payment fund by practicing saving for home maintenance. You might think if you can get a mortgage for the same or cheaper than a comparable rental, that you're saving money, but when you forget to save for maintenance costs (~1% of the value of the home annually), you are in danger of wrecking your budget. Instead, start to practice now by spreading out what you will eventually spend on annual home maintenance into monthly payments and transfer this amount to your house down payment fund.
Patricia C. Brennan, President and CEO of Key Financial Inc: When saving for a down payment on your first home, your best immediate saving strategy would be to boomerang back home. Save money on rent, but MAKE SURE you start monthly automatic withdrawals into an Index Fund. Since the S & P has been on a tear, consider a broad Global Index for diversification benefits. 2. Max out your match on a 401K, then put the excess into monthly down payment bucket (see above for specific fund). 3. Think about your day to day expense habits…Thirsty Thursdays at the bar that turn into double shot espressos at Starbucks the next day. Repeated choices like this will delay your first home purchase by a year or more! Is it worth it?
Brandon Bol, MSF, CFP®, Financial Planner & Associate Wealth Advisor at HoyleCohen, LLC: The first home you buy will not be your last (even though it may feel that way). Find a property that is within your budget (stick to it) and define the purpose this home will serve at this time in your life (starter home, expanding family, second home – step up). Even the best-laid plans can go astray because “life happens”. Ensure you have created an emergency savings fund (3 to 6 months of living expense) to protect your goal of saving for that first home. Leave the get rich quick strategies to your friends for accumulating enough money to buy your first home. Set up a realistic savings plan, stick to it, and see yourself steadily progress towards your goal of owning a home – all good things come in time (when done prudently). Sometimes we must take a step back (move home with our parents, live with 5 roommates, etc.) to take a meaningful leap forward. Don’t let that discourage you and keep in mind, most paths to one's goals are not accomplished in a straight line.
Paul R. Rossi, CFA, Rossi Financial Group: The old adage goes, "How do you eat an elephant?" Answer: "One bite at a time.” The same hold true for saving or investing. Starting is typically the hardest part, so start with a dollar amount you can afford and slowly increase that number as you become more comfortable with your ability to save. The most important part is starting and never stopping. “Invert, Always Invert.” – Warren Buffett’s long-time business partner Charlie Munger says to think like this. Basically what this means is looking at a goal or challenge from a completely different perspective. So if you want to save money for down payment on a house, use the date you want to have x dollars by and work backwards to see how much you need to save on a monthly basis.
Brian Lockett, CFP, Vice President of Compreshensive Wealth Management: Although your mortgage is a fixed payment, property taxes and insurance costs tend to creep up every year as your property value increases. To combat these rising costs, shop your home and auto insurance every two to three years through a broker—not a captive agent (one that works exclusively for one carrier). Unlike a captive agent, a broker can help you shop multiple carriers to get the best deal. Additionally, traffic isn’t getting better, at least not anytime soon. Do a test drive (or take public transit) from your potential new house DURING what would be your commuting hours to get an idea of how long it will truly take.
Corey Franco, CFS, President of NobleBridge Wealth and Asset Management Services: Determining Payment - If you would like to put down 10% for a down-payment or say $40,000, here are some things to consider:
- Geography & career path – always keep at the forefront – how can you align your personal & financial goals?
- Ensure your career path is aligned with your lifestyle, geography desires, and professional trajectory that suits your long-term needs and the ideas of raising a family as well as being a meaningful partner to your spouse.
- Solving the deposit – it’s important for you to educate and prepare yourself in advance;
- Get pre-qualified for a loan. Take a look at independent solutions like Upstart for quick and easy access to loans
- Figure out exactly how much you can save each month – once your monthly budget is scrubbed and compared to your income received you can target how aggressively you can save towards that $40,000 deposit goal!
- Determine a safe way to save these funds – such as CDs, short-term fixed income, and/or high-yield savings