Saving for your first Home
It's a dream of many young adults to buy a first home. But there's an unfortunate reality: Even buying a "starter home" can mean saving thousands of dollars for a down payment.
How do you pull it off? The key, obviously, is to save like crazy. Beyond that, here are several suggestions that may make the path to home ownership a bit easier.
1. Aim for 20 percent down.
You may be able to get by with putting only 10 percent of the purchase price down, as long as you are confident your income will remain steady or grow and you plan on keeping the home at least five years.
But buyers should ideally aim to save up 20 percent or more of the price. The risk of putting down too little: If the home falls in value and you sell at a loss, you'll owe more to the lender than you receive from the buyer.
In addition, many mortgages require buyers who put down less than 20 percent to get private mortgage insurance, which can add $80 to $100 to your monthly bill. And the less you put down, the higher your loan balance and therefore your monthly payment will be.
A buyer who puts down 5 percent on a $300,000 home with a 5.88 percent 30-year fixed-rate mortgage might pay $2,133 a month, including fees and property tax, while a buyer who puts 20 percent down would likely pay $1,682 a month. (The estimate assumes the 5 percent-down buyer must pay for mortgage insurance.)
You'll also need extra money set aside on top of the down payment for closing costs such as title insurance and mortgage fees, which can reach up to $5,000. If you want to pay "points" to lower your mortgage rate -- a smart idea for borrowers who expect to stay in a home several years -- you'll want a few thousand dollars more.
2. Keep it separate.
Set up a separate account for your down-payment funds, so the money doesn't get intermingled with other savings and so you can keep track of how much you save. This would probably be a taxable account at a bank or brokerage firm.
A suggestion is establishing a regular automatic deposit from a checking account or directly from your paycheck into the down-payment account to force regular savings. Move money to this account before you spend it.
Sit down and draw up your family budget first: Here's what we think we'd be comfortable with now, and with how that payment can vary over time. Then the lender can say yes or no as to whether you can qualify for that payment.
If you discover after the fact that the monthly payments are more than you can handle, you could face a huge loss when you have to sell that home quickly. Worse, you could be forced into foreclosure or bankruptcy. notes It is much better to be patient, buy a home you can comfortably afford, make payments, build equity and then transition into a larger home later.
3. Consider your time horizon.
How best to invest down-payment money depends on your time horizon for purchasing a home. Those planning to buy in three years or less should put the money in conservative investments such as short-term certificates of deposit or short-term bond mutual funds to shield themselves from potential market downturns.
If you're waiting at least five years to buy, you can invest more aggressively. Seek assistance from a financial advisor on establishing the right account for you.
4. Get extra help.
Few first-time buyers pony up the entire down payment on their own. Nearly 23 percent of first down payments come as gifts from relatives and friends, according to a recent survey by the National Association of Realtors.
While such assistance is great, there are also other places you can look. There are many down-payment assistance programs for first-time buyers that are offered by banks, local governments and charities. Many are open only to low- or moderate-income buyers and some are targeted to specific communities.
Many lenders have information about assistance programs that borrowers can seek help from.
5. Clean up your finances.
Your credit history will determine the loan terms and mortgage rates you qualify for. You could be offered a smaller loan or charged a higher rate if a lender is concerned you might not be able to repay.
So before approaching lenders, first-time buyers should give themselves the financial equivalent of a physical exam. This means checking your credit score and credit reports with the three major credit bureaus and fixing any errors. (Consumers can now get one free copy of each report annually by going to Web site annualcreditreport.com.)
Also consider paying down some debt, especially high-interest debt such as credit cards, that might flag you as a riskier borrower.
While some debt is okay, being overloaded will likely tarnish your loan terms.
6. Weigh mortgage tradeoffs.
Do your homework regarding mortgage types and what will work best for you. Lenders have tightened mortgage qualification standards however many options are still available. A significant cause of current financial concerns was due to buyers not understanding their loan type or basing their decision on unrealistic assumptions. Complete your financial exam and know what you can afford monthly before shopping for a mortgage. Then stick with your decision and stay within the budget you establish.
7. Hands off retirement savings.
If you're just shy of saving up enough for a home, you might consider taking a small loan from your 401(k) plan or withdrawing some principal from a Roth IRA. But many financial advisers caution against tapping retirement accounts too heavily for a home purchase.
For one thing, you're going to need your retirement stash, so you don't want to gouge it. Taking a loan from your 401(k) can also be risky, since you may have to pay it back if you leave the company. And if you take money out of your Roth, you can't replace it, so you lose some of the Roth's long-term benefit of tax-free earnings
