I’ll just come right out and say it: the best way to buy a house is with 100% cash. But that’s not really feasible for most people. So what’s the best practical way to buy a house?

My wife and I bought our first house with a 20% down payment and a 15-year fixed-rate mortgage, and let me tell you, it was hard. We lived with my parents for 3 years while I worked 2-3 jobs to save up that down payment. Especially in the Seattle area, in a rising housing market, getting a 20% down payment is not an easy feat. But I wouldn’t have done it any differently, and here’s why.

How Much to Put Down

A big down payment has two primary advantages: it puts immediate equity into your home, and it saves you interest over the life of the loan.

As of January 2020, the median house sale price in the US is $236,900 (Zillow), the mortgage rate for a 30-year fixed-rate conventional mortgage is 3.70% (Zillow), and the mortgage rate for a 15-year fixed-rate conventional mortgage is 3.16%.

With no down payment, a 30-year mortgage would end up costing you $155,770 in interest alone! With a 20% down payment on that house, however, a 30-year mortgage would only cost $120,674 in interest, saving you $35,096 over the life of the loan, or over $1,100 per year.

Why 20%? Because if you put less than 20% down, you’ll most likely need to pay PMI. Private Mortgage Insurance is an extra payment tacked onto your monthly payment that banks use to hedge their bets on your loan, which doesn’t go towards your home equity. By putting at least 20% down, you can avoid giving the bank extra money!

Why Get a 15-year Mortgage?

Following the example of the median house in the US, while 20% down on a 30-year mortgage would cost $120,674 in interest, a 15-year mortgage would only cost $48,717 in interest! That’s a savings of $71,957—not an insignificant chunk of change!

You will typically get a lower interest rate with a 15-year fixed mortgage versus a 30-year, and that’s because the banks see it is a lower risk. Current rates as of January 2020 are 3.70% for a 30-year versus only 3.16% for a 15-year. Those percentage points make a big difference over multiple decades!

As an aside, typically a conventional fixed-rate mortgage is going to best in the long-run. ARM, jumbo, and balloon loans usually end up costing you more in interest. If you can take advantage of a special first-time homebuyer program or the VA loan, though, and keep it fixed-rate and preferably 15-year with a large down payment, then by all means, take the opportunity!

Mortgage Versus Income

An important consideration here is that a 15-year mortgage will have a higher monthly payment. Depending on your income, it may not be wise to get a 15-year mortgage if the monthly payment will be too high.

We are big fans of Dave Ramsey, and he recommends limiting your mortgage payment is no more than 25% of your take-home pay. That’s really hard to do, and we were in the 35% range for a while, which can definitely be a strain on your budget. But we were determined to save in the long run, so we went with the 15-year mortgage, and tightened up the rest of our budget to make it work.

The Myth of the Credit Score

A lot of people assume you need to have a credit score to buy a house. That’s actually not true: we purchased our home with absolutely no credit score, and didn’t have any issues. You just have to find a bank that will down a manually underwritten mortgage (like Churchill Mortgage), and provide some additional paperwork to show the bank you can make on-time payments.

By dispelling this myth, it saves you the hassle of having to manage credit cards, making sure to pay them on time, avoiding debt, hoping your credit score stays high, and hoping the bank gives you a good rate based on your score. Instead, you can focus on working and saving, which is exactly what we did.

Stewardship and Homeownership

Buying a house with these principles provides a great opportunity to exercise stewardship in a number of ways. Firstly, by working hard and saving up a large down payment before you purchase, you’re practicing diligence and delayed gratification—both good life skills—as well as good stewardship of your finances.

Secondly, by putting more down and getting a shorter-term loan, you’re saving on interest and keeping more of your income over the life of the mortgage, which sets you up for building wealth—more good stewardship of finances.

Thirdly, the house itself will require upkeep, maintenance, possibly repairs or remodels, all things which a good steward of that house will embrace. Whether you work on those projects yourself or hire them out to quality contractors, taking responsibility for the property you’ve purchased to keep it in good shape and to improve it is an excellent way to start building the stewardship mindset.

Are you thinking of buying a home, or already have? How has your experience been with home buying and homeownership, and how do you think it relates to stewardship?