Recently, U.S. Mortgage Insurers (USMI) published a report revealing that, on average, it takes borrowers 21 years to save up for a 20% down payment. This number falls to 7 years for a 5% down payment, which is still a long period of renting and saving. In either case, waiting this long deprives borrowers of a significant amount of wealth accumulation from equity.
Opportunity Costs: Losing Equity
Let’s put this into perspective using USMI’s numbers (a national median income of $63,179 annually) and assume yearly home value appreciation of 5%. If a borrower saves for 7 years, a home worth $274,600 today (the national median average) would be worth about $386,389. A borrower saving 21 years for the same home would find a new home price of $728,595. The following chart illustrates the price difference for both scenarios and the difference in down payment costs.
| Home Value: | $274,600.00 | Home Value: | $274,600.00 | |
Value +7 Years: | $386,389.78 | Value +21 Years: | $728,595.55 | |
Difference: | $111,789.78 | Difference: | $453,995.55 | |
Original DP (5%): | $13,730.00 | Original DP (20%): | $54,920.00 | |
DP +7 Years (5%) | $19,319.49 | DP +21 Years (20%) | $145,719.11 | |
Difference: | $5,589.49 | Difference: | $90,799.11 |
Waiting only 7 years for a 5% down payment has the lowest opportunity cost of these two scenarios, but that opportunity cost is still very stiff: $111,789.78 difference in home value lost, and a down payment over $5,000 more expensive. It’s clear that waiting costs borrowers a lot of money, even when the down payment is smaller.
Opportunity Costs: Worse for Minorities
These numbers aren’t good, and they are much worse for borrowers in demographics that statistically struggle with the down payment barrier. For example, if the above averages were broken down nationally by race, white Americans average about 20 years to save up for a 20% down payment, putting them about on par with the national average. Hispanic Americans average about 26 years, raising the above projections and wealth loss by a decent amount. Black Americans, on the other hand, average a whopping 42 years (Private Mortgage Insurance, 6). Black Americans are also much less likely than white Americans to have family that can assist with the down payment, making it more likely that their only option is to save up. Taking twice as long to save up for a down payment, and with home values increasing yearly, black Americans lose over twice the equity wealth that white Americans do when waiting to buy a home and saving for a down payment, whether it’s a 20% down payment or a 5% down payment.
Opportunity Costs: Time
These numbers show a great deal of wealth lost when borrowers have to save for years for a down payment, but they don’t reflect the time lost as well. Waiting 21 years for a 20% down payment (or 42 years, as is the average for black Americans) sees enough time pass to have a child grow up and move out. Waiting 7 years for a 5% down payment (14 years for black Americans) sees enough time pass that a family’s babies turn into adolescents, all without the benefits of living in a home their family owns.
Opportunity Costs: Rent Versus Mortgage Payment
More immediately, borrowers miss out on a lot of wealth just from the difference between rent payments and mortgage payments. The average US rent payment is $1,343 and raises about 5% a year. Using USMI’s numbers, and assuming a fixed interest rate of 3.25% (just a little higher than the national average of 3.15%), an average mortgage payment would be $1,195—about $150 cheaper every month. This doesn’t take into account insurance, HOA fees, and other costs that come with homeownership, but fixed-rate mortgage payments don’t increase every year, while rent payments do.
Level the Field: Down Payment Assistance
At CBC Mortgage Agency, we are grateful for the efforts of groups like USMI that provide products and services that help borrowers buy a home with smaller down payments. The smaller the down payment, the sooner the borrower can buy the home and experience wealth accumulation. We also cheer that borrowers can get conventional loans with 3% down payments or FHA loans with 3.5% down payments, further lowering the down payment barrier. However, even with lower down payment options available, the down payment barrier is still very real, and still prevents many borrowers, particularly low-income borrowers, from buying a home and accumulating wealth. The next step needed to level the playing field and empower as many creditworthy borrowers as possible is down payment assistance.
Down payment assistance allows borrowers to purchase a home for $0 down, and sometimes even helps with closing costs. The difference in wealth accumulation is staggering for borrowers who can buy a home now. All the numbers presented above—the tens and hundreds of thousands of dollars lost as borrowers waited to save for a down payment—becomes future wealth when borrowers can buy now.
Actual Results: Chenoa Fund’s Success
Tens of thousands of borrowers have used Chenoa Fund to purchase a home, many of which were first-time homebuyers and/or minorities, and their stories are a testament to the importance of down payment assistance. For example, borrowers that received Chenoa Fund’s assistance in 2016 have since averaged over $59,000 in wealth accumulation! From 2016 to 2019, all borrowers included, Chenoa Fund borrowers have averaged over $24,000 in wealth accumulation. This difference is life changing.
Chenoa Fund isn’t the only down payment product on the market, and wise borrowers will shop around to find the down payment assistance that fits their unique situation best. This is a good thing—more competition means more innovation to provide a better product to borrowers, and prevents the harm or stagnation that comes with monopolies. More access to down payment assistance, specifically assistance that targets creditworthy borrowers, can only help improve American homeownership across the board, and help low- to moderate-income borrowers break the down payment barrier and see real wealth accumulation now.
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