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Buying a Home? Best Ways to Save Your Down Payment If your goal is to buy a home, you’ve probably been thinking about how and where to save money for a down payment. That’s exactly what Satta, a member of the Dominate Your Dollars Facebook group, recently asked.

Satta says, “My husband and I plan to buy a home in the next two years. But the interest rate on our bank accounts is not great, so I was considering opening an online savings account with a higher rate. What are the pros and cons of using an online bank for this?”

In this post, I’ll cover the best places to stash cash for your new home. Plus, I’ll tell you how much you should save and tips to accumulate a down payment faster.

Free Resource: Online Bank Comparison Chart (PDF) - compares top online accounts on a one-page guide.

What Is a Down Payment When Buying a Home?

For most people, buying a home is the largest purchase you’ll ever make. Becoming a homeowner isn’t for everyone—but if it is one of your financial goals, I recommend that you begin preparing as far in advance as possible.

In How to Prepare Your Credit for a Mortgage Approval, you can read or listen to six tips for building credit before you apply for a mortgage. That will help you get a loan that costs as little as possible.

But before you can even qualify for a mortgage, you’ll need to prove to a potential lender that you have enough in savings to fund a down payment. It’s a one-time cash payment you pay upfront at the closing.

The reason you have to make a down payment is because home lenders generally won’t finance 100% of the purchase price. The bigger the down payment you can make, the less risky the loan is for the lender.

The bigger the down payment you can make, the less risky the loan is for the lender.

Plus, there are closing costs on top of a home’s purchase price. They vary depending on where you buy a home, but often include:

credit check
loan origination or underwriting fee
discount points, which allows you to get a lower interest rate
inspections
appraisal
survey
title insurance, which protects the lender if the title isn’t clean
recording the new deed

How Much Down Payment Money You Need When Buying a Home

So, exactly how much of a down payment do you need to buy a home? Depending on the lender, the kind of loan you get, and your financial situation, you'll typically have to pay a minimum of 5% to 20% of a home’s purchase price.

Of course, everything is negotiable. When you make a purchase offer on a home, you can request that the seller pay some or all of your closing costs. You can also haggle with your mortgage lender not to charge certain upfront fees.

If you do negotiate with a lender to avoid fees, just make sure that it doesn’t cost you more in the long run. They can make up for fees by charging you a higher interest rate or including fees in the total amount of the loan, which means you’d end up paying interest on your closing costs.

The money for a down payment can come from your savings or gifts from family. If you’re already a homeowner, your down payment can come from the money you make when you sell your current home.

Be aware that the standards for buying a second home or an investment property are more stringent. You’re typically required to pay a much bigger down payment, such as 10% to 20%, for non-owner occupied real estate.

Private Mortgage Insurance (PMI) and Buying a Home

PMI is s a special kind of insurance that lenders typically require you to pay when you borrow more than 80% of the value of a property, even if you have excellent credit.

Speaking of putting down 20%, that’s a magic number when it comes to private mortgage insurance or PMI. PMI is s a special kind of insurance that lenders typically require you to pay when you borrow more than 80% of the value of a property, even if you have excellent credit.

PMI protects the lender if you can’t pay your mortgage and they have to foreclose. As a borrower, you don’t get any benefits from PMI, so if you can put down a minimum of 20%, you can avoid that expense altogether.

6 Tips to Save for Down Payment When Buying a Home

Before I cover some of the best places to put your down payment money, here are some tips to help you save as quickly as possible:

Savings Tip #1: Automate it

When you make saving more convenient you’re more likely to do it. So make automation your friend by having a portion of your paycheck deposited into a separate savings account just for your down payment.

You might choose a fixed amount, like $200 per month. Or you can specify a percentage of each paycheck so you save more when you get a raise or bonus.

Saving Tip #2: Save all raises and bonuses

For a set period of time, consider saving all extra income you receive from work.

For instance, if you get a 3% raise, increase your down payment savings percentage by at least that amount. Or if you get quarterly or annual bonuses, transfer the full amounts to savings.

Saving Tip #3: Save your tax refunds and gifts

Don’t forget that windfalls like tax refunds, cash gifts, or inheritances give you the perfect opportunity to save for a down payment on your next home.

Savings Tips #4 Start a side hustle for extra income

Sometimes you need to get serious about creating additional income in order to save enough for a down payment.

Consider how you can use your skills to provide a service—like tutoring, website maintenance, or giving music lessons—and bring in quick money to set aside. Or you could find a part-time or seasonal job that fits into your full-time work schedule.

Saving Tip #5: Save your old car payment

If you paid off your car loan or are close to it, resist the urge to buy another one. Keep your car and save an amount equal to the payment for your down payment.

Saving Tip #6: Tap your IRA

The rules for a traditional or Roth IRA allow you to tap up to $10,000 to buy or build your first home, without having to pay a 10% early withdrawal penalty.

But there are downsides to taking an early distribution from any type of retirement account. One is that you’ll owe federal and state income tax on any distributions that were not previously taxed.

Another con is that you set back your progress on retirement savings, which is more important in the long run than becoming a homeowner.

Also see: How to Buy a Home in 10 Steps

Best Places to Save a Down Payment When Buying a Home

Once you begin saving money for a house down payment, you’ll probably get a little anxious about where to keep it. You might be tempted to invest it with the hope of turbocharging its growth.

Unless your target date to buy a home is more than 5 years down the road, I don’t recommending putting your down payment savings at any investment risk. As you know, the financial markets are volatile in the short term, which means you could lose all or a significant portion of your money right before you need it.

What about certificates of deposit or CDs? They may offer a slightly higher rate than savings or money market account, but you give up liquidity. Your money is locked up for the term of a CD, such as 6 months, one year, or more.

The fact is that getting a tenth of a percent more interest doesn’t make it worth it—unless you’re absolutely positive you won’t need the money before a CD’s maturity date. Otherwise you’ll pay a penalty to cash out sooner.

Instead, tuck your down payment savings in a high-yield, FDIC-insured savings account. That insures your money will be completely safe, give you flexibility, and earn some interest to boot.

Online banks typically offer the highest interest rates because they don’t have as much overhead as institutions with local branches. However, local credit unions can be competitive—if you qualify for membership.

Also see: Bank or Credit Union—Which Is Better?

Online banks typically offer the highest interest rates because they don’t have as much overhead as institutions with local branches.

Interest rates for online savings accounts change frequently, but here are some good options I recommend Satta check out that have no minimum balance requirements and pay close to 1%:

Making sacrifices to become a homeowner can bring many benefits—especially if you live in an area where owning is less expensive than renting. If you have a fixed-rate mortgage, every mortgage payment you make builds equity in your home, which is a terrific way to build your net worth and wealth.

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Selasa, 31 Oktober 2017

Buying a Home? Best Ways to Save Your Down Payment