Gone are the days of 0% to 5% down payments. We're returning to our mortgage roots: 20% down on a home at a fixed rate for 30 years.
These old-fashioned mortgages worked for good reason. For one, payments were easy to understand and easy to budget for. Further, the struggle to come up with that hefty down payment meant the ultimate purchase was more stable for the owner and the community, financial experts say.
"If you have 20% equity in your home, you're more secure," says Steve Habetz, president of Threshold Mortgage in Connecticut. "You're able to weather financial storms, and you're not paying private mortgage insurance."
Sounds sensible. But how do you come up with that kind of money in today's market?
Average home prices jumped 81% between 1996 and 2006, to $221,900, according to the National Association of Realtors. That means to buy the average house you need $44,380 to satisfy a 20% down payment.
Impossible unless you're independently wealthy? Maybe not. The following three households are committed to buying homes the old-fashioned way.
Who: Wendy Nystrom, 34, insurance underwriter
Where: Jersey City, N.J.
What she bought: A recently renovated two-bedroom co-op for $375,000 with $75,000 down.
Income: "About the same as my down payment."
How she did it: Starting in her early 20s while making $25,000 per year, Nystrom started sending small amounts of money to a financial adviser who invested her money in stocks. All the while, she contributed to a retirement account and lived well within her means. In her early years, she shared a house in Boston with five other women, paying $200 per month in rent.
When she moved to New York City in 2001, Nystrom had a brief lapse in monetary judgment with shopping and restaurants binging -- until her sister reined her in and placed her on a budget. The plan required an unreasonably large contribution to savings, however, and not enough spending cash. So Nystrom created her own modified budget, which included automatically contributing a percentage of her income to savings and playing mental games with herself to stay on track. "Whatever extra I have in my bank account, I think I have less." If she knows she can afford to blow $1,000, she convinces herself the sum is half that.
"When I was in my 20s, I thought do the normal thing and get married and be taken care of," Nystrom says. "That hasn't happened, so last year I decided it was time to grow up and do what I have to do and stop paying rent." In her hunt for a mortgage, she heard plenty of brokers' pitches for subprime mortgages, but knew it made sense only to go the old-fashioned route.
She now savors coming home after work and entertaining friends on the weekend in a place she calls her own.