Saving for a Down Payment

Mortgage and Tax Info

In the housing boom of the last several years, many lenders have been happy to jump on the bandwagon with low and no down payment mortgage offers. Times have changed, and with the specter of government regulation and oversight looming, 0% down payment mortgage offers are harder and harder to find. If they’re not exactly a thing of the past yet, they’re definitely not long for this world. In the changing financial climate, lenders are returning to the more conservative lending standards of the past. That means tighter credit restrictions and a reinstatement of down payment requirements. Depending on your situation and the lender, the required down payment can range from 5% to 25%.

Coming up with a healthy down payment is more than just a way to help your chances of getting a mortgage. One of the other important advantages of putting a substantial down payment down on your house is a lower monthly mortgage payment, which will make a difference in your life every single month.

How much of a difference? If you are buying a $150,000 home at 6.06% interest and a 30 year mortgage, you’ll pay $902.12 per month with no down payment. A 20% down payment means that you’re only borrowing $120,000. Under those same terms, your mortgage payment will be $724.10. That’s nearly $2,100 more each year in your pocket. Over the life of the loan, you’ll save nearly $25,000 in interest costs because you’re borrowing $30,000 less.

Sounds good, doesn’t it? Well, except for that part about having to come up with $30,000. It sounds pretty scary if your current savings balance in the “Well, I’ve got a month’s expenses tucked away” range, but it’s really not as hard as all that. There are a number of different ways that you can grow yourself a healthy down payment on the house of your dreams.

1. Start with a budget.
Okay, don’t panic here. A budget is nothing more than a plan on how you’ll spend your money. Planning your budget may take the better part of an afternoon, but it will be well worth it, because your budget is the basis for almost every other way to build yourself up a healthy down payment. Here’s a very simple budget sheet to help you figure out how much money you have and how much you spend. budget sheet at seekingsuccess.com

Once you know how much you are making and spending, you can start looking at where you can save more money.

2. Shave expenses.
You may be surprised where your money goes. If you spend $6 a day on Starbucks and a bagel on the way to work, you’re spending $1,500 a year just on coffee and a bagel. Cut out one dinner out a week and save another $2,600.

3. Stop paying interest.
If you’re carrying balances from month to month on high interest credit cards, you’re pouring money away. A $10,000 balance on an average credit card with an interest rate of 15%, you’re paying over $1400 a year in interest charges. Figure out how much you’re paying in interest on your credit cards with this credit card interest calculator.

The solution? Pay down your credit cards and stop paying interest. You’ll save money and improve your credit rating at the same time.

4. Borrow the down payment from your retirement plan.
Most companies will allow you to borrow from your 401(k) or other retirement plan. It’s one of the few allowable uses for early withdrawals from your IRA. If you’re a first time home buyer, you can take as much as $10,000 from your IRA for a down payment. If you’re married and you’re both first timers, you can EACH take $10,000 for a total of $20,000 toward your down payment.

5. Set up automatic transfers from your checking account.
One of the easiest ways to save is to have a set amount deducted from your payroll deposit and moved to a savings account each week. It’s the modern version of “pay yourself first” – only easier because you never handle the money yourself. That lets you avoid the temptation to spend it… just this once.

6. Review your savings periodically.
Savings accounts are great places to keep your “three month emergency money”. They usually have slightly higher interest rates than checking accounts, and give you easy access to your money in case of emergencies. Once you have your emergency pad, though, you should look for a higher interest home for your additional savings. Sit down with a financial planner for help in finding the right investments for you.

Beyond savings…

There are other ways to accumulate money for a down payment on your dream house as well. Here are a few of the best ways:

1. Borrow from a relative.
Parents and other relatives are often more than willing to help finance the purchase of a first home.

2. Take a temporary second job.
Working a second job can be stressful, but having a clear goal in sight can help reduce that stress. If you’re covering expenses but not making enough to save as fast as you’d like, a second job can bring in several thousand extra dollars a year to put toward your down payment.

3. Check your eligibility for federal home loan programs.
A federal home loan program like Fannie Mae can help you qualify for a mortgage with a low interest rate and very low down payment.

4. Look into homebuyer gift programs.
Homebuyer gift programs work with home sellers, builders and lenders to help qualifying home buyers with down payment assistance. Typically, you’ll have to qualify for a mortgage through a participating program. The mortgage lender notifies the gift program that you’ve qualified. The gift program sends the money for 1% to 7% of the down payment. The home seller pays a fee equal to the down payment assistance gift, and sometimes a small administration fee.

Essentially, homebuyer gift programs are a workaround to the regulations that prohibit home sellers from providing down payments as buyer incentives.

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Date: Sunday, September, 30th 2007 @ 02:09:32 PM
Views: 375