If buying a home is on your radar, you're probably excited to get the process started and are ready to start pounding the pavement in search of a home. But as much as you'd like to start looking at homes and even putting in an offer on a property that you fall in love with, you'll also need to take a good hard look at your finances. After all, buying a home is a huge financial investment and is one that first-time home buyers need to take into careful consideration.
Most likely, you will need to take out a mortgage in order to finance your home purchase, and a key component to securing a mortgage is gathering an adequate down payment amount that will be put towards the mortgage approval process and the actual purchase of the home.
The thing is, it can be really hard to come up with all that liquid cash needed to get a mortgage. Depending on what type of mortgage you're looking at applying for, that amount could be higher than you think.
A conventional mortgage requires a minimum down payment amount of 5 percent of the purchase price, and if you want to avoid paying Private Mortgage Insurance (PMI), that amount will soar to 20 percent. If you choose government-backed loan programs, you'll still need a 3 percent to 3.5 percent down payment. For example a FHA loan requires 3.5 percent down. Though there are special circumstances whereby no down payment will be required. A loan from Federal Housing Administration can be a zero-down loan.
That said, in the overwhelming majority of cases, a down payment will be required. That means you'll need to hunker down in the months or years leading up to a home purchase in order to give you enough time to save up for this large up-front payment. Yet while it may sound daunting, saving for a down payment doesn't have to be more difficult than necessary. Here are a few tips to help you save enough for a down payment when the time comes to buy a home and take out a mortgage.
Pay Down Your Credit Card Debt
It can be tough to save money for a down payment when a lot of your hard-earned money is going towards monthly payments of high-interest credit card debt. In order to free up some money to be put aside for your down payment fund every month, consider focusing on your credit card debt and how you can pay it all off.
Credit cards tend to have the highest interest rates in the world of loans (aside from payday loans) and can go as high as over 20 percent. And the higher your outstanding balance, the more money you're paying in interest monthly. Not only will paying down your credit card debt free up more money for a down payment, it will also reduce your debt load, which will help increase your chances of getting approved for a mortgage.
Take A Look At Your Spending Habits: Cut Back on Spending
This might sound obvious, but a great way to save for a down payment is to simply cut back on your expenditures and put that money that would otherwise have been spent on other things in a savings account. If you go out for dinner a couple of times a month, make dinner at home. If you're used to buying your morning coffee every day, consider brewing your own at home.
You can even make more drastic sacrifices, such as buying a cheaper car, cutting back on vacations, dropping cable TV and your landline telephone, or maybe even taking public transit. While many of these sacrifices may not seem pleasant, they can be extremely effective at helping you gather up enough funds for a down payment at some point down the line.
Dedicate a Percentage of Your Income to Saving
Consider taking a percentage of your paycheck to be put towards a savings account for your down payment. For instance, if you get paid every two weeks, take 10 percent off your paycheck and deposit it into a savings account before you use it. You can also choose to dedicate a specific amount to your savings, such as $50 or $100 a month.
This will require some self-discipline, as it can be easy to use that money for something else. Just keep your eye on the prize, and you'll be pleasantly surprised at how much the pot can grow by taking this approach.
Automate Your Savings
If you've decided that you're going to dedicate a certain amount of your paycheck to save for a down payment, you can automate these savings rather than manually plucking the money from your paycheck and depositing it into your savings account.
Call up your bank and arrange to have a certain amount automatically transferred from your checking to your savings account every month. Alternatively, you may want to get in touch with your payroll department to see if they offer the option to deposit a portion of your pay into a dedicated savings account.
Either way, automating your savings not only takes the work off your plate, it also reduces any excuses you might make for using that money for something else before it's even had the chance to be put away.
Borrow From Your 401(k)
If the time comes to buy a house and you're still struggling to save for a down payment and need more assistance, you may want to consider borrowing from your 401(k) account. When you take out a loan from your 401(k), you are basically borrowing against yourself. Despite this fact, the money will still need to be repaid with interest. Granted, this rate may be low, but it is still worth noting that the money isn't "free."
If your 401(k) plan allows you to borrow against it, there are certain rules that will need to be followed. For starters, you can only borrow 50 percent of your 401(k) balance if you are fully vested in the account. The money will also need to be repaid within five years, and payments will have to be made at least quarterly.
Final Thoughts For First-Time Buyers or Low-Income Families
Saving money for a down payment can be a challenge, but it's certainly one you can handle. With a little sacrifice and careful planning, there's little reason why you shouldn't be able to have saved enough for a down payment on a home down the line when you're ready to make a home purchase.