Bay Area home buyers increase down payments to save on mortgages

Silicon Valley and San Francisco home buyers are pouring more into their down payments to save on mortgage costs.

The average homebuyer plunked down $235,183 this fall for a home in greater San Jose, the San Jose Mercury News reported, citing figures from Realtor.com. The median downstroke is on the upswing.

The typical down payment in the South Bay city hit nearly 25 percent of the purchase price in the third quarter, from 23 percent early this year. In San Francisco, the median down payment rose to 24.4 percent, from 21.8 percent.

Even with soaring Bay Area home prices, the initial payment portions are higher than anywhere in the U.S., and much higher than the national average of 14.7 percent. The median down payment in the Bay Area is seven times higher than the national median of $30,400. 

“Because interest rates are so high, people want to keep their mortgages affordable,” Esther Chien, a mortgage officer based in San Jose, told the Mercury News. “The only way to do that is with a higher down payment.”

The median cost of a house across the Bay Area is $1.27 million.

Assuming a mortgage rate of 7.22 percent, a down payment of 25 percent, instead of 20 percent,  would result in a monthly savings of $432. But that means having to ante up $63,500 more for the down payment.

A higher down can also make a buyer look less risky to a bank, Chien said. In return, a bank may offer a discount of 0.25 percent on the interest rate.

Bay Area buyers can make bigger down payments because many earn much more than most Americans — 52 percent higher than the national average. Many of the region’s tech workers make well north of $200,000 a year.

Buying a Bay Area home may take more cash. First-time home buyers often make a down payment using a cash gift from a relative, Chien says. Local real estate brokers also joke about how each time a major tech firm goes public, home prices spike as workers use their shares to fund initial offers.

To buy luxury homes around Cupertino and Saratoga, where the median sales price is $3 million, buyers typically make down payments closer to 40 percent, with nearly a third coming in  with cash-only offers, Ramesh Rao, a real estate agent specializing in luxury properties, said.

“Here, it’s more up-market, rather than a first-time homebuyer’s market,” Rao told the Mercury News. “They have access to more funds, whether it’s stocks or equity in an existing home.”

Should interest rates cool next year, buyers may not need to offer such a large down payment. But by that time, home prices will likely have climbed — so while the percentage of the purchase price may be reduced, it’ll be a greater purchase price overall, canceling any savings.

If there’s one thing we know about prices in the Bay Area, Rao said, “it’s that they go up.”

— Dana Bartholomew

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