Should I put down 20% when I buy in SF? Do I HAVE to?

Like I always say….it all comes down to strategy. The answer is not so simple, as it would be to say….people from your parents’ generation or even others that have been conditioned to thinking: YES, you must put down 20%, it’s the only responsible way here in San Francisco. While they have a point, it’s not the only one and depending on your own individual situation, it may not be the right path as a first time homebuyer.

Plenty of pros and cons of putting down that much, just from a pure surface level analysis here in the Bay Area. Putting down 20% assures you of avoiding PMI on your loan, securing a better interest rate (unless it’s a condo, then the sweet spot is 25% down), ending up with lower monthly payments and (finally), it improves your chances of overall loan approval in the end.

Some quick downsides can be (for starters) that 20% down is a SHIT TON of money!! With higher price points here in the Bay Area, that is no chump change that most first time buyers just have laying around in their liquid accounts. Putting down that much money also will almost assuredly deplete your cash reserves, which can leave you in pinch if you ran into an emergency, lost your job, needed to fix something expensive on your property, etc. Most important, I feel, is that there can be a better return on your money elsewhere as opposed to sinking it all into a home.

If you’re a first time homebuyer here in San Francisco with a lot of money saved up in the bank, for example, but you have relatively low annual income, making the biggest down payment possible COULD be sensible for the reasons (PROS) I stated above. Or, maybe your situation is reversed. Maybe you may have a good household income but very little saved in the bank. In this instance, it may be best to use a lower down payment strategy while planning to allow the market to appreciate and make up the difference for you into the near future. In strong markets like San Francisco and the Bay Area, in general, even with modest appreciation rates you can be looking at making up 5-10% equity by way of appreciation in just a matter of a few years. In some rare cases, in as little as 1 year.

One thing is true for everyone, though — you shouldn’t think it’s “conservative” to make a large down payment on a home in/around San Francisco. Similarly, you shouldn’t think it’s “risky” to make a small down payment. In fact, I strongly feel that the opposite is true when it comes to real state and financing here in the Bay Area for first time homebuyers. About the riskiest thing you can do when you’re buying a new home is to make the largest down payment you can. It’s conservative to borrow more, and we’ll talk about it below.

These last few years, I have sat down with many aspiring first time buyer and in most all cases, we have come to the decision to put down 10%, 15% on homes and keep some cash back on hand, leave it invested and earning more, or not have to borrower from family to round out the full would-be 20% down payment. While the reasons for going down this pathway may have been different for all of them, the end game was the same – they were all left in a better position for it, despite its incongruence with conventional wisdom.

There are tax advantages, as well, to looking into lower down payment scenarios and allowing the market to help make up the difference for you here in San Francisco. I love chatting about this very topic, so reach out anytime you would like to learn more and strategize on how it might make sense for you, too!
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Should I Pay Extra on my Monthly Mortgage Payments?

Making additional mortgage payments on my Bay Area mortgage…..good idea?

With people taking out such large mortgages here in the Bay Area, there is always talk or the question of the whether its a good idea to pay extra on the mortgage to reduce the balance faster.  Making that decision even more difficult is the fact that rates are sub-4%.  

In theory, paying extra on your mortgage makes good financial sense.  It means a near-guaranteed return on your investment, which isn’t always the case for other investments or places you park available dollars.  As a thought, if you have a mortgage at 4.5%, you are essentially guaranteed to earn 4.5% – by saving in interest – on any amount of principal balance that you pay off early.  Most all loan allow for you to make additional payments on your loan, as prepayment penalties are nearly a thing of the past now. However, making extra mortgage payments isn’t always the right strategy for every homeowner.  Some borrowers opt for refinancing to shorter term loans, like the popular (but seldom sought) 15 year mortgage, which severely cuts the amount of interest they WOULD have paid.  

So what exactly happens when you send in extra payments?  When making a regular payment, there is interest AND principal comprising of that total.  If you are to write a separate check that is included with your payment, specifically noted/marked as “ADDITIONAL PRINCIPAL,” the lender will apply this payment as a full reduction to the loan balance.  Over time, this can save tremendous amounts of interest, especially during the initial years of the loan when most of the payment is only being applied to interest for the lender.  

I mentioned earlier that this strategy isn’t for everyone.  You should always consider the fact that a mortgage is the cheapest money you will ever borrow, especially these days, and if you have other debt obligations, then they should probably assume priority for any extra payments.  Other high interest debt such as credit cards, personal loans, auto loans, and even student loans should all be handled first before paying down a mortgage.  A reminder – your mortgage interest is tax deductible and other interest loaded debt is not.  So by prepaying principal, you will pay less interest and in the end, get less of a write off over the life of your loan.
Priority with extra funds for a household should be:
1) Credit cards
2) Rainy day fund (12 months of income in case of a job loss or economic downturn)
3) 401K contributions for the year/employer matches
4) House or other retirement accounts.  

To look closer into whether refinancing or paying down your mortgage makes sense in todays rate environment, shoot me an email at arjun@lendclear.com to learn more or apply now to weigh out your options.