How to Save Money on your Home's Down Payment

Written by Posted On Sunday, 03 December 2017 22:21

 

Purchasing a home is a goal of most people that usually falls somewhere between marriage and kids. However, a lot of people don’t have a clear plan for getting their finances in order which makes securing a mortgage that much harder.

                              

By learning how to save for a down payment on a house you will gain a valuable financial skill that will serve you well the rest of your life. Namely, you will see the benefit of setting a goal and sticking to a solid plan to achieve that goal.

Here are some ways shared to us by directfinanceloans.co.nz to help you save money on your home’s down payment:

 

Calculate how much down payment you need

 

Before taking any action for leaping money for your home’s down payment, you should have first need to know how much you will be needing to save. It is advantageous to sit down and plan with a mortgage lender for you to know how much of a mortgage you can qualify for.

Commonly, your housing expense should always be less than 28% of your stable monthly income. So if your net monthly income is $10,000, you can safely allocate $2,800 to your future house payment.

The mortgage principal and interest, real estate taxes, and mortgage insurances, and any other related fees shall all be covered by this $2,800. And with mortgage rates at about 4.5% this will translate into a loan amount of about $355,000.

Of course, you still have to add the required down payment on top of that. This is usually at least 20% of the total price of the house. While you can have a lesser down payment, you will end up burdening upon paying a higher monthly rate.

 

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Credits to Burst

Set an automated savings plan

 

When you make deposits into a savings account automatically and regularly, you don’t have to think about it — the money is deposited before you have time to worry about expenses or how much money will be left over. Once you get used to it, you might not even miss the money.

Thanks to modern technology, it is very easy to set up an automatic savings plan.

First, you need a savings account. Open one at the bank where you have your checking account if you don't already have one set up, and make certain your checking and savings accounts are linked.

If you currently have direct deposit through your employer, you will find the easiest (and most effective) way to establish your automatic savings program is to have part of your paycheck directly deposited into your savings account (the rest, as usual, will flow to your checking account to cover your bills). It doesn’t matter if it is $10 or $500 — simply setting this up automatically will ensure you save money every single time you are paid.

If you don’t have direct deposit, there is still an easy option available: set up an automatic transfer from your checking account to your savings account every time you're paid. For example, if you're paid every other Friday, you could establish an automatic transfer of a set amount of money from checking to savings to coincide with this deposit. Just make sure you're aware of when the money will be deducted each month, or you may find yourself overdrawn.

Borrow from your 401(K)

 

Borrowing from your retirement plan to fund a down payment isn't a ter­rible strategy, especially if you want to lock in today's super-low mortgage rates (the recent average for a 30-year fixed-rate mortgage was 3.5%). Now that no-down-payment loans are a thing of the past, borrowing from a 401(k) has become a popular option. Some 9% of recent home buyers used funds from a 401(k) plan or pension for a down payment, according to a 2012 report by the National Association of Realtors.

 

IRA for a First Home Purchase

 

The Internal Revenue Service rules allow a special exemption from the additional tax on early IRA withdrawals, saving those distributions from the 10 percent penalty. Contrary to your intuition, under the IRS definitions, you can qualify to be a first-time home buyer more than once in your lifetime. Knowing how you can use the exception can help you avoid extra taxes.

For the purposes of the IRA distributions, a first-time home buyer is anyone who hasn't owned a present interest in the main home for the previous two years. For example, if your parents have promised to leave you their home in their will, that isn't a present interest in the home, so you still qualify. As a result, you can qualify as a first-time home buyer several times during your lifetime.

Owning your own home is the great American dream, yet for many these days that’s exactly what it can feel like – a dream. But no matter where you are in the US, buying a home to live in or as an investment isn’t impossible.

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