If you’re on a journey to purchasing your first house, the first step in the grand plan is to save a significant sum for the down payment. It’s an excellent way to cover for the most significant expense you’ll likely make, as well as a smart tactic for saving money down the line.
However, offering the appropriate down payment is not as straightforward as it seems. If you put down less than 20% of the full purchase price on your loans, you will be subjected to acquire mortgage insurance. This will increase your loan amount by 1% annually until it reaches 80% of the value of your house.
That’s why saving up for a 20%, or more down payment is crucial if you want to get the lowest possible rate and dodge private mortgage insurance. To that end, the tips above should help you prepare a reliable and reasonable budget for your future home.
Saving Cash for Down Payment
The most basic and accessible first step is using your monthly income to set aside a stash for your down payment. It is also one of the trickiest methods as it requires you to determine a reasonable budget that allows you to save and pay bills without compromising the quality of your living.
Calculating the down payment will help you construct a time frame you can adhere to, allowing you to have a guide that can help adjust your budget accordingly. Remember, you need to have money working for you while you are saving if you want to fast-track your progress.
In that regard, utilizing high-yield savings or money market account can help you reach your goals quicker as it adds interest to your savings.
Using Retirement Plans for Down Payment
If you have enough money in your retirement accounts, you can tap that plan and use it as a source for your down payment. Fortunately, there are 401(k) and 403(b) retirement plans that enable future home-buyers to borrow money as a significant aid when purchasing a home. First-time buyers, on the other hand, also have the benefit of getting money from your IRA account.
If you’re worried about affecting your application for mortgage loans, borrowing from your 401(k) plans will not factor in your debt-to-income ratio. This means that your credit score will remain untouched, though it is not without its penalties.
Failing to repay the loan will force you to pay income taxes as high as the amount you borrowed. Meanwhile, leaving your job when the loan repayment is not yet complete will result in only having 60 to 90 days to pay it all off before consequences arise.
First-time home-buyers often encounter the first down payment as the biggest hurdle in their journey to purchasing a house. Making the most of your down payment means dodging mortgage insurances, which will only be possible if you can offer at least 20% of the asking price.
That’s tens to hundreds of thousands of dollars, making the process of saving for a down payment a long, arduous ordeal. However, there are ways to acquire a large sum of money sooner than you think. The guide above should help clue you in on saving for the biggest purchase of your life.