Getting Down with Downpayments

Getting down with down payments – 5 tips for savings

You’ve been cruising Zillow and Realtor.com for a while.  Maybe you’ve popped by a local model home and gotten a taste for homeownership, but your bank account is singing a different tune.  The bottom line is you need a down payment in order to make the dream of homeownership become a reality.  Where should you begin?

First and foremost, buying a home will likely be the biggest purchase you’ll make in your lifetime, so you should seek to understand it as completely as possible.  Conduct some research, speak with financial advisors you trust, and begin socking away pennies for a down payment.  

Why do you need a down payment?  Consider it your “skin in the game” or cash proof that you’re prepared for a monthly mortgage payment.  It’s also equity that you’re putting into your home; so while it’s a large one-time cash payment, consider it money in your new piggybank of homeownership.  

Size matters, so when considering how much you’re going to put down on a home, remember the gold standard is 20% of the price of the home.  Once upon a time you couldn’t buy a home without 20% down, but today’s loan programs provide far more options for new homeowners.  It’s a good idea to consult a mortgage lender to talk about how much loan you’ll qualify for, and how much you’ll need to put down as a down payment.  Don’t know any mortgage lenders?  Ask me for a referral to a local lender you can speak with in person.  This initial step will put you on the path to saving the right amount for your down payment.

If can afford to save 20%, you’ll avoid paying for PMI which is mortgage insurance that covers the lender for low equity loans.  You will also have an easier time garnering approval for a conventional loan with a 20% down payment.  If 20% is too much to stash away, there are programs for first-time, low-income homeowners through the Federal Housing Administration (FHA).  Military families and veterans can qualify for (VA) loan programs through the U.S. Department of Veterans Affairs. You can learn which kind of loan you qualify for by meeting with a local lender or banker.

Once you understand how much down payment you’ll need, start saving!  Try some of these tips for socking away your nest egg:

  1. Set-up an automated savings account. As with any savings plan, the best advice is always to pay yourself first.  Designate a fixed amount of your paycheck to directly deposit into a savings account.  If you don’t see it, you’re less likely to spend it.
  2. Track your spending. The best way to find more money in your budget is to track your spending.  Consider making small sacrifices like the number of times per week you purchase a coffee from Starbucks and strive to replace two trips a week to Starbucks, that’s $10 per week in savings which will net another $40 per month into your savings fund.  If designer coffee isn’t your Achilles’s heel, consider other indulgences like beer, wine, cigarettes, lottery tickets or eating out regularly.
  3. Make a budget.  If you haven’t already, use what you learned from tracking your spending to better understand how much you spend and examine where you could possibly cut back.  Writing down a budget and knowing how much to spend in each category is an empowering tool when trying to save money.
  4. Shop around.  When is the last time you shopped around your insurance plan, data plan, cell phone usage, or cable plan?  Can you bundle services?  Can your credit card company lower your APR? If you haven’t inquired about the latest discounts in a while, you might be missing out on “found money” that you could be applying towards your nest egg.
  5. Watch your money grow.  While it may have been difficult to make sacrifices along the way, once your nest egg begins to grow you’ll want to consider investing it.  Talk to your bank about savings and investment strategies like a high-yield savings account with a higher interest rate than a standard savings account, or a money market savings account with a variable interest rate, or a CD (certificate of deposit which locks in your money at a specific interest rate for a specific period of time).

As your down payment grows, you’ll come closer to your dreams of home ownership.  Let me know if you ever want to talk about buying a home or investment property, and what kind of financing needs you might have.  I am always happy to listen or point you in the right direction of a trusted lender.

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