Saving for a Down Payment

Your buying power is also impacted by the down payment you plan to make on your next home because the more you’re able to put down, the less you will have to borrow. In addition, with a down payment of 20% or more, you won’t have to purchase private mortgage insurance (PMI) and you may also be able to negotiate a lower interest rate.

Read on for advice on how to save for your down payment.

First-Time Buyers

If you’re thinking of buying a home one day, one of the first steps to take is to start saving for a down payment. Here are some tips to make saving easier.

• Set a savings goal. One way to figure out how much to save is to use the average sales price for homes that are similar to what you want and figure out your target down payment percentage.

 

• Cut back on expenses. Review your monthly expenses and look for ways to save. Think about items you can live without or cut back on temporarily while you’re saving.

• Look for ways to boost your income. Get a side job or sell items online or at a garage sale to increase your income in a short amount of time. Be sure to save any windfalls you get, including your annual income tax refund or work bonuses.

• Check out home-buying programs. Your state, county or local government may offer special programs, such as grants, for first-time buyers to use.

• Ask your family. Twenty-eight percent of first-time buyers were given money from family or friends to use toward the down payment of their home.2

 

Repeat Buyers

If you’re thinking of buying another home, here are more ways to save more money, in addition to the tips listed above:

• Rent a room. If you have an income flat (or mother-in-law unit) attached to your home, rent it out and channel the income into a high-interest savings account.

• Make your money work for you. If you don’t plan to buy for at least five years, invest it and let the compound interest work for you. Discuss this option with your financial planner or broker to see if this is ideal for you and your goals.

• Tap into your 401(k). If you have a 401(k) plan, you may be allowed to borrow a portion of it, the lessor of up to $50,000 or half of its value, for your down payment. Remember, it’s a loan so you’ll have to pay it back. If you leave or lose your job before you’ve repaid the loan, you’ll have between 60 to 90 days to repay the balance or face stiff taxes and penalties.

 

Investors

Whether you’re buying a second home or a rental property, here are a couple more tips to save for a down payment.

• Tap into your equity. If you’ve paid off or paid down your mortgage on your primary home, you may be able to tap into your equity to purchase another property. Contact your lender to learn more about a HELOC or home equity loan.

• Get a partner. Find a friend or relative who’s willing to purchase property with you. Typically, you’ll split the costs and profits equally. Just make sure to work with an attorney to create a partnership agreement to fit your situation.