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Saving for a Down Payment

| Home Buyer Guidance

If you’re ready to enter the exciting new frontier of home ownership, one of your first steps will be to save up for a down payment that’s right for your budget and desired home. Even before scouting neighborhoods or finding a lender, starting a savings plan will put you in a much better position to buy your dream home.

The general wisdom goes that new homeowners should save 5-20% of a home’s total sale price to put down for an initial payment. One thing to note is that if your down payment is less than 20%, you will be subject to private or public mortgage insurance payments. However, a 20% down payment simply isn’t affordable for some families. Get acquainted with a realistic number for you by visiting a mortgage calculator and plugging in your own current income stats.  Also, if you qualify for FHA, you might be able to put as little as 3.5% equity down.

Next step? Why, saving, of course! We’ve got some common sense and creative strategies to get you going.

Downsize in Order to Upsize

Although it may cause a bit of concern, downsizing to a one-bedroom vs. two-bedroom apartment could knock 24% off your monthly rent if you live in Beverly Hills. In Manhattan you could save 16%, 21% in Austin, and 19% in Seattle. That money can then go directly towards your down payment.

For instance, if you currently spend $1,500/month on rent, moving to a more modest spot could result in $240-360+ extra cash per month, depending on where you live.  The extra monthly savings adds up quickly and could go towards your dream home.  Similarly, consolidating a two-car household into one helps drum up cash from the sale of the extra car, as well as eliminating half of your insurance and gas payments.

Moving to a smaller place or selling a car may seem like a step backwards, but remember that it is only temporary, and leads to a much more satisfying step forwards.

Invest in Low Risk

Make sure to maximize every dollar you put away by stashing it in a CD or high-yield savings account. There, your money will be safer from the whims of the stock market, and you’ll be earning some interest rather than if you kept it under your mattress. Keep an eye on the term of your CD so that the funds will be liquid when you are ready to buy. You may want to comparison shop the competitive interest rates at banks, credit unions and online banks.

Ask About Your IRA

Many believe that it’s a no-no to withdraw money from an IRA retirement account, as this may cause a 10% fee for early withdrawal. However, if you’re in the housing market for the first time, check out the IRS FAQ pageto see if you and your partner qualify to take out up to $10,000 each while skipping the 10% penalty. Although you will pay income tax on your IRA withdrawal, bumping up your contributions to the account in advance of preparing your down payment could help you get there faster.

Purge Before You Move

Moving households is often a time of re-assessment. Do you really need three eggbeaters or the non-working stereo you’ve lugged around since college? Turn the purging of excess stuff into a boon for your down payment savings plan by hosting a yard sale. Getting rid of that unwanted furniture or clothing might bring you hundreds of dollars closer to your goal. You can also take to the web and use eBay and Craigslist to offload your used television sets and office furniture.

Get Visual

The saying goes that if you can visualize it, you can attain it. Track your savings by month and post the figure somewhere prominent, such as on your bathroom mirror or fridge. Seeing the $$ mount is sure to provide that extra dose of motivation.

Cut the Fat

You don’t need to cut out all your “fun” spending to save up for your down payment, but you can certainly identify easy places to eliminate by using an online finance aggregator such as Mint.com. Once you see the bar graph for that morning coffee bill, it might feel a little less tragic to cut down the coffee purchases to once a week. Even if it seems like chump change, that $2 a day adds up to $60 every month.

Be Informed

Although your big purchase may be a couple of years down the road, taking a home buyer’s class or meeting with a real estate agent to discuss state and local housing breaks and possible grant programs makes good sense. Be sure to take advantage of all of the housing incentives that are available in your community. Similarly, some employers participate in programs that help employees save for down payments. Make sure to drop by your HR office and ask.

Take a Second Job

Yes, you have a busy lifestyle already, but adding a second job, if permitted, or picking up some freelance hours is another fantastic way to earn your down payment. Just a few hours a week can end up paying big dividends down the road.

With the right guidance and realistic goals, saving up for a down payment is totally achievable. Start a smart savings plan today and get that much closer to closing on your home.

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