In the face of growing income disparity and the recent housing crash, the housing market may look bleak for young workers looking to purchase their first home. However, there are still options for home financing that works for millennials and any generation for that matter.
Owning Versus Holding Rights
Of course, you don’t really “own” the property until you’ve fully paid the loan. But you do enjoy rights to the property that you would not as a renting tenant. Unless you have millions or hundreds of thousands just laying around, which very few of us do, you will need to finance the property before you can own it. Housing prices in the city are always going to be significantly higher than in rural areas.
You are purchasing a small area that is highly developed, as opposed to a large natural area with little or no development. Because of this, you must carefully consider the placement of the property when searching for a fair price. Millennials are often looking for the best places to live for young professionals. As they say, location, location, location.
Urban Versus Suburban Housing
There are two types of housing properties in your typical American city: Urban and suburban. Unless financed through projects and federal aid, urban properties are going to be significantly more expensive than suburban properties. Urban housing properties are typically sections of larger buildings that sometimes serve multiple functions.
You can finance these properties just like any other, and some of them carry multi-million-dollar price tags. Beyond this, reasonable apartment options or condo can offer you the same cost as a standard suburban house.
Suburbs provide housing for workers in the metroplex and surrounding area. In cities like Miami and San Francisco, suburban developments make up the vast majority of the population and land area. These are typically single-family detached homes among yards and parks, closer to rural areas than city center properties. In the suburbs, you can get a 2-3 bedroom property with a yard for the same price as a city center apartment.
Let’s talk about numbers. The median price of housing properties in the United States is $294,000. You will need to pay part of that upfront as a down payment, and the rest is paid over time through the financed loan. The longer your loan term, or the time you have to pay it, the higher the final price. Because of this, you do not want to purchase a 30-year or longer loan unless you want to pay significantly more money than the property is worth.
For example, say you put 5% down on this median price home, most new buyers are paying 6% or less on their down payment. That’s $14,700 upfront if you sign on a 30-year fixed-rate mortgage that’s roughly $1,857 per month afterward. That’s $22,284 per year or $668,520 over 30 years. You don’t need a calculator to see that paying $668,520 for a $294,000 home is a bad deal.
Unless you are fortunate enough to receive help for your down payment in the form of a gift or loan, you will have to rely on saving your own funds. Even then, there are some cases in which a down payment itself can be financed through a second loan. Be wary of any debt you accrue. There are many legal businesses with predatory loaning practices. Let’s say you put 20% down on the same home in a 15-year fixed-rate mortgage.
That’s $58,000 upfront and a monthly payment of $2,033. This comes out to $24,396 per year or $365,940 total over 15 years. Not bad as far as interest goes, that’s $71,940 total interest as compared to $374,520 interest in the 30-year loan. You can get even shorter loan terms if you overpay your monthly interest or finance a shorter-term loan. 5-year or even shorter loans exist on the market.
If you have a credit score of 580 or above, you can be approved for a Federal Housing Administration Loan, or FHA Loan, with just a 3.5% down payment. With an FHA Loan, you would pay only $10,290 upfront and $2,654 per month for 15 years or $2,025 per month for 30 years. Again, this is the median home price. There are many properties for much lower or higher that can put your monthly payment anywhere between a few hundred to over ten thousand.
In a security sense, a lower down payment is better as the bank will likely not profit from foreclosing on a home without much money down. In a timing sense, a larger down payment is better as it will lower your monthly payment and lower the time it takes to pay off.
In order to avoid massive interest payments, you want to finance the shortest loan with the largest possible down payment. If you absolutely must finance a 30-year fixed-rate mortgage, be prepared to pay several times more interest at the benefit of a slightly lower monthly payment. In short, young workers, such as millennials, can still afford to finance homes in the city if they are wise about purchasing loans.
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