Down payments frustrate a lot of would-be homeowners. Coming up with a large sum of cash can seem impossible, but it doesn’t have to be.
Setting up a savings plan now will help you get the down payment you need and show lenders you’re a responsible borrower.
For Down Payments, Bigger Is Better
Sound financial planning can help you amass a large down payment, which has several benefits:
- Homeowners with small down payments can find themselves with mortgage balances much greater than the value of their homes (because of interest). Larger down payments can prevent this problem.
- While low down payment loans are available, lenders prefer to write loans with larger down payments. The larger the down payment, the less risk for the lender.
- You’ll increase your chances of getting a loan with a lower interest rate.
- When you put 20% or more down, your loan won’t require mortgage insurance or a second mortgage to avoid mortgage insurance.
Make Saving a Habit
Saving for a down payment is tough, but there are some strategies you can use to making saving money a habit—not a chore:
- Budgeting is important, because if you don’t know where your money goes, you won’t know where you can cut back.
- Set up a payroll deposit into your savings account or set up an automatic checking-to-savings transfer on payday to make things easier.
- Consider certificates of deposit (CDs), money market funds and other low- to no-risk savings or investment vehicles to help your savings accumulate faster.
Give Yourself a Boost
Saving for a down payment one paycheck at a time can be frustrating. To help you get there faster, use some of these tricks:
- Cut back on nonessential spending. Do you really need to pay for Starbucks, name-brand items or subscriptions to magazines and cable TV? There could be many items you can eliminate from your budget, and the savings would be substantial.
- Reduce your credit card debt to save credit cards for emergencies only.
- Adjust your tax withholding to make sure you’re not overpaying. It may feel good to get a tax refund in the spring, but that really is a free loan to the government. The money you get back is cash on which you could have been earning interest. The IRS website has a calculator to learn how much in taxes you should have withheld from your income.
- Liquidate expendable assets. Saving for a home may be just the reason you’ve been looking for to unload stamp, coin, baseball card and comic book collections or other items that are collecting dust in your closets, safe deposit box or storage space.
- Get another job. If you are already squeezed, consider working retail during the holidays, selling on eBay, taking on freelance work or finding some other source of income solely for the purpose of saving for that down payment.
- Organize. That’s right: Sell all that stuff you never use that won’t be a good fit for your new home. Clear the clutter—an organized home is a time-saving home, and time is money.
Updated from an earlier version by Broderick Perkins.
