As the holidays approach, you
may be thinking that you would like to celebrate next year's festivities in a
home of your own. But first you need to save for a down payment, a task that is
becoming increasingly challenging as the housing market recovers.
The cost of buying a home has
increased 12 percent over the past year. According to the National Association
of Realtors, the median price for a single-family home is now $203,500. A
minimum 5 percent down payment on a conventional loan for this amount will set
you back $10,175. Of course, home prices are even higher in many cities and
metropolitan areas. Mortgage rates also are on the rise after hitting
near-record lows of 3.35 percent in May.
It can be challenging to save
money for a home when you are juggling other expenses like rent, car payments
and even credit card debt. These tips can help you achieve your dream of home
Open a dedicated savings account. It is easier to track your progress when you keep
your down payment savings account separate from other funds. (You also will be
less tempted to dip into those funds.) To make it easier to save, automatically
deposit a set amount into the account with every paycheck. As your savings
grow, you might want to transfer the funds into a money market savings account
or a certificate of deposit (CD). These enable you to earn a much better
interest rate. Just make sure that the terms fit your timeframe. Some of these
accounts penalize early withdrawals.
Explore your loan options. Most conventional mortgages require a down payment of
20 percent of the home's purchase price. However, Federal Housing
Administration (FHA) loans sometimes require only a 3.5 percent down payment.
The government backs these loans, which include most closing costs and fees.
Because the FHA insures the mortgage, lenders often are more willing to adjust
terms to make loan qualifications possible. If you have a history of credit
problems such as a bankruptcy or foreclosure, an FHA loan may be worth looking
into. To see if you qualify for this type of loan, go to an FHA-approved lender
or broker. Find a lender in your area via the U.S. Department of Housing and Urban Development.
Borrow from retirement. It is rarely a good idea to take money out of
retirement funds because of the negative effect on your retirement plans. You
also will owe early withdrawal penalty fees and taxes. However, first-time
homebuyers are allowed to withdraw up to $10,000 from individual retirement
accounts (IRA) without penalty. If you have a 401(k) account, you can borrow up
to half of your vested account balance, but no more than $50,000. Some 401(k)
plans allow hardship distributions. To access funds this way, you must prove
that your 401(k) funds are the only way you will be able to put a down payment
on a home. When you borrow from a 401(k), you must repay the funds, with interest,
within five years.
Stretch your budget. Review your budget every month to see where you can trim and save.
Keeping the down payment in mind as your priority, cut back on nonessential
expenses like dining out, concerts and vacations. Try to negotiate lower rates
on things like car insurance and your smartphone plan. Consider moving into a
smaller apartment that charges less rent. Take a look at your debt load. You
may be able to get a different repayment plan for your student loan. You can
consolidate and transfer credit card debt to a card that charges lower
interest. You can even shift your car loan to a lender that
offers better rates.
For already-stretched budgets, it is not easy to find
money for a down payment. Stay confident by remaining realistic about your
goals and the timeframe it will take you to reach them. And during the time you
are saving for your down payment, pay attention to improving your credit score.
A stronger credit score will help you secure a better interest rate when you
are ready to buy that house.
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
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