The second question posed to Kiplinger's in the March 2010 issue that I did not like the answer to is: "...I'm finally ready to buy a home. How much cash do I need?..."
Kiplinger's answer explained that 5% down is needed for a conforming loan (up to $417,000) and 10% if a larger mortgage is needed. 20% down is needed to avoid Private Mortgage Insurance but only 3.5% is needed to consider a Federal Housing Administration (FHA) loan. Another 2% to 7% will be needed for closing costs.
Now my "real" answer:
What Kiplinger's stated is correct but off the mark. The amount of cash you need is dependent upon your household income. Don't let a mortgage banker or Realtor tell you what you can afford. See an independent financial planner.
If you are in your "earning years" for the next 35-40 years, then no more than 28% of your gross income should be spent on the mortgage (principal, interest, taxes and insurance). In some areas of the country, maybe you could stretch this to 31%, but Dave Ramsey (another radio and TV personality) suggests no more than 25% of disposable income.
So, the amount of down-payment has nothing to do with the answer to this question of how much you need.
Determine the amount of the mortgage you can afford first and then back into the down-payment. If you don't have the cash required without depleting your emergency funds then purchase a smaller home or continue to rent.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.