How to Save for a Down Payment


O.K. then. Unless you're a veteran, you almost certainly need a down payment to buy that dream home you have in mind. So you're saving for that down payment while paying rent to the landlord. What are the odds you can save enough? Not good. 

Bank of America pays .03% APY (Annual Percentage Yield – the compounded rate of return).So, put a thousand dollars in the bank. After a year you've made $3. Congratulations. 
Well, Goldman Sachs pays 1.6% APY, so your thousand bucks, after a year, has earned you $16. Now, that's a lot better. But still not getting you close to what you need. 

Here's the thing: Whatever you're paying for rent, you might well be able to live somewhere similar for a mortgage check around the size of your rent payment. So actually owning – being your own landlord – may cost about the same as you're paying now. All you need is the down payment. Most people think you need 20%, but with the right mortgage broker and lender, you might be able to do 5%, depending. That's a quarter of what you think you need. 

Last year, according to the Greater Boston Association of Realtors(r), condo values in the area rose by 6.6%. That's better than 1.6%. A $300,000 condo has risen in value by $19,800. Add that to your downpaymet and you've got $34,800 instead of $15,000. That $19,800 is a 132% return on the original investment of $15,000. 

How does a 6.6% appreciation rate turn into a 132% return? Because the smaller the down payment, the higher the Return on Investment (ROI). A $300,000 condo appreciating at 6.6% is always $19,800. But it all belongs to the owner, none to the lender. It's all yours. If you put 20% down ($60,000) your ROI is 33%. 5% down ($15,000), the ROI is 132%. Obviously, that's better than 1.6%. 

The place you need to put your money is in a home. That's where it's likely to appreciate. Instead of saving up to buy your dream home, buy a home that will build your equity so you can use it for a down payment on something closer to your dream. If need be, do it again in a few years. Your odds of ending up where you want to, go way up. 

I'm not an investment counselor or even a mortgage broker. You should check my math at least with a mortgage broker. Also, real estate doesn't always appreciate. Sometimes it even depreciates. But over the long run, real estate values in general go up. In any specific case, I – or any Realtor(r) -- would be glad to help you figure out the costs involved. Still, I'm pretty confident of what I've said here.