Saving for a Down Payment
For many people, buying a home is typically the largest and most significant single purchase they will make in their lifetime. When preparing to buy a home, it is important to understand what is affordable and how to prepare for this purchase in the form of a down payment.
Know How Much You Need
A down payment is a one-time cash payment provided at closing. The size of this payment has a long-term effect on personal finances, as it determines the monthly mortgage payment and initial home equity. How much you are financially able to put down may help you decide which loan is right for you. There are advantages to putting down more money up front. If you put down more money up front, your monthly payments will likely be less. If you put down 20%, you can possibly save on private mortgage insurance or PMI. However, not everyone has 20% to put down, but there are plenty of other options available. For example, a FHA loan requires only a 3.5% minimum down payment while a VA loan can be approved without a down payment or mortgage insurance.
Savings Tips for a Down Payment
Once you know how much you can afford to spend on your home purchase, it is time to start saving. Many people choose to create an automated savings plan that directly deposits either a fixed amount or percentage of each paycheck into a cash savings account.
Another option is buying certificates of deposit or CDs. CDs offer slightly higher rates than savings accounts because your money is “locked” for the term of the CD. Mature dates can be set to an estimated time frame that you expect to have the bulk of your down payment saved.
In addition to these savings plans, do not forget to save any periodic windfalls to speed up your purchasing timeline. Bonuses, tax refunds, large gifts, or side income earnings go a long way to build up your savings even faster.
Finally, you can never underestimate the power of budgeting. Simply tracking how much money is coming in and going out can go a long way in establishing a smart home savings plan. A budget can also show you where expenses can be cut, giving you more money to put aside in a savings account.
No matter how you go about trying to save a little extra to put aside for a down payment, it can be done with a plan. Set a goal, create a plan, and work towards it!
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