“I am of Mexican American descent, and within my family, acquiring a home takes precedence above all else,” expressed Rita-Soledad Fernández Paulino, a personal finance educator, CNET member, and founder of .
Soledad highlights that this sentiment is widely shared in immigrant households, especially among those originating from countries without a stock market. For them, homeownership represents the cornerstone of financial stability, serving as the most valuable legacy to be passed down to future generations. In 2021, Hispanic homeowners held of their net worth in home equity, in contrast to 41% for white households.
However, prospective homebuyers today encounter obstacles that make budgeting for a home purchase challenging. With the escalating prices of homes in the US, covering the down payment, not to mention the upfront costs, has become increasingly arduous. As of February, the median down payment stood at , marking a 24.1% surge from the previous year.
Soledad had been contentedly renting for many years without a specific timeline for homeownership. Yet, in 2021, she and her husband opted to prioritize owning a home. They have been diligently saving and are progressing towards securing a property they can comfortably afford in the coming years.
With four years of experience as a money coach, specializing in aiding BIPOC women and LGBTQ+ communities in achieving financial autonomy, Soledad is resolute on leading the life she desires while prudently navigating the path towards such a substantial investment. She remarked, “I believe many individuals fail to align their finances with their desired lifestyle, leading to overwhelming situations when contemplating a major purchase.”
Saving for a Home Down Payment Without Hastiness
Residing in California, Soledad is keenly aware of the [ppp[1]].
In her view, it is advisable to prolong the saving period and commence the homebuying process with a robust financial cushion rather than rushing into a decision that could potentially pose challenges later on. This approach entails ensuring the ability to sustain homeownership costs over the long term.
Here are several initial steps recommended by Soledad for individuals aspiring to purchase a home.
1. Prioritize Building Your Emergency Fund
Before embarking on saving for a future home acquisition, Soledad suggests establishing an emergency fund with approximately six months’ worth of living expenses.
At the age of 23, Soledad was a novice teacher in New York. Pressured by her family to invest in a home, she initiated a savings account and directed her job stipends into it. Without a designated budget or separate account, she occasionally tapped into her down payment savings for trips or unforeseen expenses.
A pivotal moment occurred when a medical emergency necessitated bed rest for Soledad in her early thirties. During this period, she received a personal finance book that, while not entirely aligning with her views, served as a catalyst for enhancing her financial literacy.
After formulating her initial budget, Soledad focused on clearing her sole debt and subsequently prioritized accumulating six months’ worth of living expenses in an emergency fund.
Maintaining a well-stocked emergency fund can provide a safety net for meeting monthly mortgage obligations in the event of job loss or a medical crisis.
While not mandatory, reducing debt can enhance your debt-to-income ratio, potentially facilitating a smoother mortgage approval process.
2. Establish a Down Payment Goal
A 20% down payment is often deemed ideal for securing a mortgage or purchasing a home, a target Soledad is diligently working towards.
A larger down payment enables Soledad to secure a smaller loan and likely qualify for a more favorable interest rate from her prospective lender. Moreover, it ensures she has greater equity in her home from the outset.
A substantial down payment can also enhance your competitiveness as a buyer, particularly in markets characterized by limited inventory and prevalent bidding competitions.
By analyzing how various down payment sizes impact future mortgage payments using , Soledad is equipped to make informed decisions. While a fixed mortgage rate was assumed for this illustration, it is worth noting that some lenders may offer varied rates based on the loan amount.
| Down Payment on a $500,000 Home | 30-year Fixed Mortgage Rate | Monthly Mortgage Payment |
|---|---|---|
| 5% | $25,000 | 6.5% |
| 10% | $50,000 | 6.5% |
| 20% | $100,000 | 6.5% |
Benchmark Your Current Housing Payments
Soledad aims to maintain her future monthly housing expenses at or below $4,800, mirroring her current rent amount. This familiarity assures her that she can comfortably sustain this figure without compromising on other expenditures or dipping into her savings.
During her quest for a property, Soledad was advised that placing a 20% down payment on an \(800,000 house would yield a monthly mortgage payment of approximately \)4,000. While this sounded appealing, she encountered challenges finding properties in her Los Angeles locality priced significantly lower.
Soledad deliberated on whether to opt for a less down payment on a pricier house, recognizing that this would elevate her mortgage obligations and necessitate sacrifices in other areas like vacations or dining out.
Researching home prices in your desired neighborhood can guide you in determining a suitable price range. Be open to compromises, such as relocating to a more affordable area or downsizing, especially for first-time homebuyers with constrained budgets.
3. Allocate Funds for Additional Homebuying Expenses
Soledad is committed to accumulating ample funds to cover miscellaneous homebuying expenses, including closing costs, property taxes, furnishings, and future maintenance charges. After consolidating these expenditures into her homebuying budget, she aims to amass a minimum of $290,000 before finalizing a home purchase.
She even devised a tool to evaluate her home affordability based on property prices and her accumulated savings.
Here’s an overview of Soledad’s recommended based on various home prices and a 20% down payment. (Furniture costs are denoted as $0, but these can be factored into the overall required amount.)
4. Optimize Your Investment Strategy
Soledad leverages the potential for growth offered by her high-yield savings account. However, she diversifies her investments across multiple avenues.
Anticipating several years before their home acquisition, Soledad and her husband opted for non-liquid investments. While liquidity and ease of withdrawal are crucial for immediate fund accessibility, their investment horizon allowed for a diversified approach.
Once Soledad accumulated \(10,000 in her high-yield savings account, she ventured into the stock market via a taxable brokerage account, progressively contributing a total of \)30,000. Although investing in stocks carries inherent risks, it can yield superior returns over time. Notably, Soledad had already realized a $4,000 profit from her investments during her last assessment.
They also capitalized on , offering interest rates comparable to or surpassing premier high-yield savings accounts. By investing in Series I bonds, the return rate remains fixed for six months, subsequently adjusting semi-annually to align with inflation.
I bonds are an attractive option for individuals not requiring immediate access to funds, as a one-year holding period is mandatory, with early redemption incurring a three-month interest penalty.
While diversifying savings across multiple accounts is not obligatory, it presents an avenue to leverage higher annual percentage yields and maximize returns on investments. Tailor your investment strategy to your timeline, ensuring funds earmarked for short-term objectives remain accessible.
5. Anticipate Financial Setbacks
Flexibility in budgeting equips individuals to navigate unexpected challenges. Medical emergencies, job transitions, or other life events may disrupt your financial trajectory temporarily, underscoring the importance of preparedness.
Upon relocating to California, Soledad initially rented a property from her mother, paying \(1,400 in monthly rent. This arrangement afforded her an additional \)1,000 per month, which she channeled towards her savings objectives.
Subsequent relocation to a new apartment escalated her rent to $4,800 monthly, necessitating a pause in her homebuying contributions. However, her emergency fund shielded her from depleting her down payment savings to meet the heightened rental costs. This period prompted a reassessment of her budget, emphasizing the imperative of augmenting their income significantly.
6. Enhance Your Earning Potential
Accumulating funds for substantial expenses, such as a home purchase, entails a prolonged timeline, which is entirely acceptable. However, accelerating this process hinges on augmenting your income streams, a strategy that yields a more pronounced impact than mere expense curtailment.
Soledad underscores the efficacy of boosting income while ensuring a balanced lifestyle to sustain long-term financial growth. Her husband’s transition to a new role at a publicly traded firm, entailing Restricted Stock Units (RSUs) as part of his compensation package, exemplifies their commitment to bolstering their financial resources.
The couple devised a strategy wherein vested RSUs were promptly sold, with the proceeds channeled into their down payment fund following the requisite emergency fund allocation.
Not all RSUs vest immediately; some entail a multi-year vesting period before becoming accessible. Exploring alternative avenues to enhance income, such as engaging in well-compensated and low-stress side hustles tailored to your lifestyle, can further bolster your financial trajectory.
In Conclusion
Soledad’s introduction to the realm of personal finance initially harbored notions of shame and stigma associated with debt and spending.
However, her journey culminated in a compassionate and inclusive approach to financial management and wealth accumulation. Through her platform, Wealth Para Todos, Soledad endeavors to empower marginalized communities by dismantling financial barriers, while promoting self-care and financial literacy among her clientele.
Her philosophy underscores the compatibility of financial prudence with a fulfilling lifestyle. Saving for a down payment need not entail deprivation; rather, it should be viewed as a means of aligning your financial objectives with your desired quality of life.
When embarking on the path to homeownership, reflect on your short- and long-term financial aspirations. Evaluate how homeownership aligns with these goals and consider its implications on your savings, retirement, and personal endeavors.
While Soledad continues her journey towards property ownership, she remains steadfast in her approach, eschewing haste. Balancing her aspirations with financial prudence, she aims to secure not just one but multiple properties in due course.
“I may be 37 and currently not a property owner, but I am on that path,” affirmed Soledad. “With the skills I am cultivating, I am confident in eventually owning multiple properties.”