The Biggest Piece of Advice I Give First-Time Home Buyers!

As a first-time homebuyer, you may feel overwhelmed by the process of buying a house. With so many things to consider, it's essential to get the right advice to make informed decisions. One piece of advice that often comes up is to save for a 20% down payment to avoid private mortgage insurance (PMI). However, this may not always be the best idea.

The biggest piece of advice I give first-time homebuyers is to avoid being penny smart and dollar stupid. This means not making decisions based solely on the immediate cost and instead considering the long-term benefits. For example, many homebuyers aim to save 20% for a down payment to avoid PMI. But, let's break down the math to see why this may not be the best option.

Suppose you're looking to buy a $500,000 house using an FHA loan (3.5% down payment). With this type of loan, you'll need to pay PMI, which will cost you around $230 per month. Over two years, this will add up to $5,500. This may seem like wasted money, but what needs to be considered is appreciation of that home.

In California, the average appreciation rate for the past 39 years has been 6.77%. However, let's be extra conservative and use a rate of 3.5%. After two years, your $500,000 house will have appreciated to $535,600. By waiting to avoid PMI and saving for a 20% down payment, you would have missed out on this appreciation. In this case, spending the $5,500 on PMI would have resulted in a $35,600 appreciation gain. By not waiting, you now have $30,000 more!

Therefore, it's essential to consider the long-term benefits of your decisions, rather than just the short-term costs. In most cases, paying for PMI will be the better option. As a first-time homebuyer, don't be penny smart and dollar stupid. Consider all the costs and benefits before making a decision. Sometimes, the decision that seems cheaper in the short term may end up being more expensive in the long run. 

P.S. Let us know if you want to see data for a specific zip code, we love digging into the numbers! Stats from InfoSparks.