How to Save for Your Home’s Down Payment
Your down payment is a one-time cash payment you provide at the closing. The size of this payment has a long-term effect on your finances, as it determines your monthly mortgage payment and your initial home equity.
Saving for a down payment
Buying a home is typically the largest single purchase a person will make in his or her lifetime. When you are preparing to buy and finance your home, one of the most important decisions you’ll make is how to handle the down payment. So how will you save? Many people save for their down payment for several years. The higher your down payment is, the lower your loan and monthly payment will be.
Here are some ways to help make sure you have enough money when it’s time to get your mortgage.
- Transfer a fixed amount into a special savings account every month. This is the most popular—and convenient—way to save. Set up an automatic direct deposit into a savings account. Commit to never use these savings for any purpose other than your down payment.
- Review your expenses and look for what you can reduce or eliminate. Put the money you would have spent on these items into your down payment savings account.
- Reduce your high interest rate debt. High interest rates on credit cards can seriously limit your ability to save. Pay off your high interest rate credit cards. Start with your highest interest rate card; when you’ve paid the entire balance, close the card, and proceed to pay off the next. At a minimum, transfer your credit card balances to the card with the lowest interest rate.
- Skip vacations for a year. If you save the money you would have spent vacationing, you can make significant contributions toward a down payment.3. Lower your expenses.
- Borrow from a relative. Many parents or relatives help out when it’s time to buy a first home. Gifts can come from your family, spouse or a domestic partner. Just be sure to include the amount of the gift on your loan application.
- Borrow from your retirement plan. Look for penalty-free withdrawals for home buyers in your plan. Many company-sponsored 401(k) or profit-sharing plans allow employees to borrow against their savings to purchase a home. Your Human Resources or Payroll department can help.
- Sell some of your investments. Think of this simply as a way to move some of your current investments into another investment vehicle – your home! As you make payments on your mortgage, you accrue equity in your home. As the value of the home increases, so does the return on your investment.
- Get a second job. Even temporarily, earnings from a second job can help you make substantial contributions to your down payment savings.
- Look into down payment assistance. Some organizations might help you with your down payment. See if you qualify with the Federal Housing Administration, the US Department of Agriculture Rural Housing Service and the Veterans Administration. Also check out local housing authorities to see if they have programs to help.
In general, it is a best practice to put down 20% or more when buying a home. At 20% down, you will have an easier time getting approved for a mortgage and will be able to avoid Private Mortgage Insurance (PMI), which is an additional monthly cost for low-equity home owners. PMI can cost hundreds of dollars per month, so it is in your best interest to avoid it.
If you don’t have a 20% down payment, you can still buy a house with a lower down payment but you’ll just have to pay monthly PMI. Many lenders and states offer loan programs geared toward first-time, low-income homeowners through the Federal Housing Administration (FHA) loan program, or military families through the U.S. Department of Veterans Affairs (VA) loan program.
Some lenders and banks also offer loans requiring less down payment, but you will need to check with them to see if that is an option for you.
- In general, it is a best practice to put down 20% or more in cash when buying a home, however lower down payment loan programs are available.
- Investing can help you reach your down payment savings goals faster than only saving in a cash account
Tony Clark Realtors believes everyone should feel confident when buying and selling a home. We believe that everyone deserves exceptional service and honest guidance thru the changing real estate market. Since 1976, we are the Owensboro Kentucky market expert. The Tony Clark Team are available and ready to be your trusted real estate adviser.
Tony Clark Realtors | 2934 Frederica Street Owensboro, Kentucky | (270) 683-SOLD