Determined young saver struggles to raise down payment
You’ve seen news stories recently about how student debt is keeping people from taking the next steps in life. This is not one of those stories.
Not that Anthony Yarnall doesn’t have student debt. The 26-year-old graduated from Washington University with a degree in urban planning and $ 55,000 in debt.
It wasn’t supposed to be like that.
“I went to the University of Washington on a Track Scholarship,” says Yarnall. “But two years later, when I became a city planning student, I was running out of class time to go to meetings. I had to stop running.
It turned out to be a costly decision. Yarnall lost his scholarship and within a year took out $ 30,000 in loans to pay for out-of-state tuition. “I joined the National Guard to get the state tuition rate, but still graduated because of a lot,” he says.
Yarnall is allergic to debt. He grew up in Santa Clarita, near Los Angeles, and witnessed what happened in 2008 when California was the epicenter of the subprime loan collapse: “During the financial crisis, I saw many friends lose their homes and their parents lose their jobs. It was scary.”
“Fear” is also a word Yarnall uses to describe his thoughts on his student debt, which carried an interest rate of 7%. His strategy? Get rid of it quickly.
He landed a job as a program analyst at a transit agency and took a heavy toll on his loans – paying off at least $ 2,000 a month. In less than two years, he paid off $ 55,000 in student loans. How is it possible? Yarnall earns $ 71,000 a year from his job and brings in an additional $ 3,000 a year in National Guard service – but he doesn’t spend more than he did as a student.
“I pay $ 550 a month to live in a comfortable house in West Seattle and have five roommates,” Yarnall says. “It might be a bit of trying to live with so many people, but mostly I like it.”
Yarnall hopes the next place he lives is a house he owns. That’s why he contacted Money Makeover. Our partner, the Financial Planning Association of Puget Sound, matched him with financial planners Holly Davis and Jonathan Coleman from Activity Financial Planning in Seattle.
Davis was immediately impressed with Yarnall’s discipline. “He took the $ 2,000 a month he was saving to pay off his school debt and redirected it to a down payment for the house. He’s sort of an outperformer, saving 44% of his pre-tax income. I congratulate Anthony on this.
In addition to buying a house, Yarnall also wants to save money for his graduate studies so that he can fulfill his ambition to become a project manager on a large transit project. Because he has competing financial goals, planners asked him what his top priority was.
“He said he wanted to buy a house in about three years and that his goal is a house that costs around $ 600,000,” Davis said. “He expects to start a family and he wants a single family home that will allow him to grow.
Here’s the part that job planners don’t like. They worked out the numbers and found that there was no Seattle dream home in Yarnall’s immediate future – most likely a Kent condo. There are several reasons for this dose of reality.
By the time he met the planners, he had saved $ 20,000 and was hoping that all of that could be used towards the purchase of his house. Yarnall figured the planners would have an idea of where he could put the money so that he could earn more than the savings account he’s currently in.
“He wanted to overburden the savings. Especially in light of the volatility in the market these days, it’s not a good idea for a short-term goal, ”says Davis. “Anything other than an FDIC insured savings account, you’re putting those funds at risk.”
More bad news for the house account – planners calculate that Yarnall needs an emergency fund of $ 16,000 to cover six months of expenses. The fund will also allow him to lower his auto insurance premiums by increasing the deductible. This reduced her home ownership savings account to $ 4,000.
With an audible sigh, Yarnall says he’s feeling anxious because house prices in the greater Seattle area are rising more and more, and he’s worried he’s missing the boat.
“Anthony was a little scared of the housing situation,” Coleman says. “The more he puts in the bank, the more houses go up. This dream is more difficult to achieve than before.
But not impossible. The secret, Davis suggests, is to make a down payment on the dream by entering the housing market with a cheaper property.
“A lot of people in Seattle are in the same situation. We recommend Anthony target a cheaper home and step in the door, ”says Davis. “It will appreciate at the same rate as the dream home and Anthony will gain in value in the real estate market. “
Based on what he’s doing now, planners say Yarnall could afford a house in the range of $ 400,000. He will want to wait until he has a 20% down payment to avoid paying for private mortgage insurance.
“Holly and Jonathan did a fabulous job showing me what I could afford. They also recommended that I have a roommate to help with the costs. I really appreciate it, ”Yarnall says.
The big idea here is to keep Yarnall from getting poor, which means that an overwhelming chunk of his income is tied to paying for the house alone.
“Anthony should keep his monthly mortgage payment below $ 1,700 per month or 28% of his income,” says Davis. “More than that, and he might have a hard time covering other expenses and saving for retirement.”
During the three years he worked, Yarnall did a good job of getting his retirement funds off the ground. He pays 10% of his salary into a 401a and his employer pays 12%. (A 401a is offered by government and nonprofit organizations. Unlike a 401 (k), the employer sets the contribution levels for the employee.) At 12%, the consideration Yarnall gets from his organization is generous, but Davis says it’s because the employer does not participate in Social Security.
“When I last checked my 401a, I have $ 53,000 at retirement. It’s in a managed fund and because it’s managed Holly and Jonathan say it’s going to cost me a lot of money over time, ”Yarnall says. The planners found funds in Yarnall’s plan with much lower expense ratios and it passed to them. They have the same aggressive exposure to equities as his previous fund.
While he hasn’t always liked what he’s learned about the price of the house he can afford, he’s thankful the planners put it in place to be successful.
“As for the goal of buying a house, well, they can’t give you more money,” Yarnall says. “When it came to reshaping my retirement, I didn’t have the financial literacy to figure it out. Holly and Jonathan have saved me money throughout my life. Literally.”
Getting A VA Loan – When Does It Make Sense?
“If I hadn’t joined the Guard, my student debt would have been over $ 100,000 and that would have been ugly,” says Anthony Yarnall.
He believes he saved $ 50,000 by joining the National Guard to get tuition at UW. And now he could reap another financial benefit.
Next year, when he serves in the Guard for six years, he will be eligible for a loan from Veterans Affairs. This could allow him to settle into a home faster, as he could finance the purchase of a home with as little as $ 0 down payment and without having to pay mortgage insurance.
But is it a good idea? The interest rates on VA loans are generally lower than those on conventional mortgages. Right now, a VA loan is just under 3% while a conventional loan is on average 3.25%, according to Caliber Loans, a VA loan provider in Washington state.
VA loans are not free, however. Financial planner Jonathan Coleman points out that there are fees that could be as low as 1.4% with a down payment of 10% or more. With a deposit of less than 5%, the fees are 2.3%
“If you have a 20% down payment, it would probably be cheaper to get a conventional loan,” says Coleman. “Avoiding mortgage insurance is one of the main advantages of VA loans for those with down payments of less than 20%. “
Also, the fees for a VA loan increase the second time a buyer applies. So, planners say Yarnall might be better off going conventional for his first, possibly smaller, home purchase and getting a VA loan when he’s ready to buy his dream home.