How To Save For A Home Down Payment Without Draining Your Retirement Savings

by Guest on November 3, 2009

how to save for a home down payment without mortgaging your futureWith the prices of homes in this present market, it leaves us contemplating whether or not we can even afford the down payment. Add to it the cost of taxes and home insurance and it can become a very stressful situation. If you are looking to own a house in the future, saving your money today with strategic planning can prepare you for the down payment in the timeline you choose. Before resorting to withdrawing money from your retirement savings or 401K, consider other options first.

The amount of your down payment will affect your savings plan. Before the housing crisis of 2008, lenders were granting mortgages without down payments. Today, very few if any banks will take that risk, even if your credit is superior. Calculate 20% of the home sale price to be safe and prepared. Don’t forget to include closing costs and miscellaneous expenses. You may be able to put down less money; however, any number below 20% of the sale price and you will need to purchase PMI (private mortgage insurance). This insurance protects the lender should you default on the loan. It is wise from a financial standpoint to put down the 20% and pass up the PMI. PMI adds unnecessary costs to your mortgage.

In order to start saving, you need to calculate an approximate amount for a down payment and gather all of your assets and liabilities. Your assets would include your checking and savings accounts, stocks, CDs, and any other investments you may have. Though retirement plans and IRAs can be counted toward your down payment, it is not advised to use them. It is not worth borrowing against your future to buy a house today. Once you have that amount, divide it by the number of months you want to buy your house. Take that figure and look at your finances to determine if that is feasible. If not, you may need to reexamine your timeline or consider a more drastic savings plan.

It is now time to start examining your outgoing monies to see what can be cut. Determine what your “needs” and “wants” are and try to be objective. See how much you can cut down and then go back and perform this step again. When you see how little your cut is the first time, you will find more things to cut the second time around.

As you are accumulating your savings, consider putting your money in accounts that will pay you back more interest than the normal savings account. You can make your savings work for you by placing it in a 5% interest account rather than 1%. Money market accounts or CD’s will be great options depending on the amount of time before the home purchase.

Another option is to find a rental home you like with an option to purchase. The landlord may credit a percentage of the monthly rent towards the purchase price or down payment of the home. However, only the portion of the rent that exceeds the fair market rent for the residence will be applied to your down payment, so consider whether or not this works for you.

Whatever you decide, if you plan correctly, your American dream of owning a house can become a reality. If you stay calm and keep your future assets in place, you will be happier knowing that you purchased your home without mortgaging your future.

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