Here are some tips on how to save for the down payment on your future home. We hope this will help you to most effectively tap into your resources and budget your finances. The more money you have saved for a down payment, the more choices you will have when negotiating your mortgage.
Keep Track of your Finances and Cut-back on Non-essential Spending
Write down your monthly income, savings, and spending. Even a couple bucks for your daily Carmel Macchiato at Starbucks adds up. So instead of spending money on the small stuff, put that into your savings. Open a savings account specifically for the down payment. Calculate how much you can afford to contribute to this account and arrange to make regular deposits.
Pay Off your Debt
Don't focus solely on saving for your down payment at the expense of paying interest charges on credit cards. The interest rates on these loans are much higher than the average rate for a home mortgage, meaning you are actually wasting money by accumulating a larger down payment while carrying credit card debt. Also, realize that the amount of debt you already have will determine how much you can borrow for your home. After minimum payments, start with the card with the highest interest rate and pay as much as you can. If you have more than one card, repeat this process after you've eliminated the debt in the first account. You'll be amazed how much money you can put into savings once it is not paying for interest on credit card debt.
Make your Savings Work for You
Rather than saving all of the money yourself, let what you've already saved earn you interest at the best rate possible. Often the best option is a Certificate of Deposit. Although the earnings on CDs are lower than some other types of investments, this is offset by a lower amount of risk. However, CDs can carry very low rates of return when interest rates are low. In these times, it is advisable to buy several certificates with different maturity dates. This strategy is known as laddering; if interest rates rise, the short term certificates can be reinvested at a higher rate. If rates should fall, then the longer term CDs have locked in a higher rate of return.
Use Special Programs
There are many programs for homebuyers in down-payment distress. Borrowers in a wide range of incomes, locales and professional groups may have access to aid from Fannie Mae and Freddie Mac, the government-sponsored offices that buy mortgages and package them as investments. Some lenders and government agencies will let you buy a foreclosure with no down payment if you have good credit and they are anxious to have the home occupied, or if you have skills that you can use to increase the home's value. Various nonprofit and community groups also lend a hand to buyers struggling to put money down on a home. And don't forget about assistance from state agencies. To qualify for a down-payment assistance program, the purchaser typically can earn no more than 80% of a region's median income.
Use IRA Funds
Tax laws allow you to use up to $10,000 in Individual Retirement Account funds as a down payment if you have never owned a house. If you are married and you both are first-time buyers, you each can pull from your retirement accounts, meaning a potential $20,000 down payment. The IRS defines a first-time buyer as one who did not own a principal residence at any time during the two years prior to the purchase of the new home. If you are eligible, the IRS waves the penalty fee for early withdrawal. Although, you are likely to owe state and federal income tax on the amount withdrawn depending on the type of IRA you have. If you do not qualify as a first-time buyer, early withdrawal will include a 10 percent penalty as well as income tax
Borrow from your 401(k)
Consider borrowing against your 401(k) for the down payment. Unlike an IRA home-related withdrawal, you'll have to pay back any money you take out. Even though your account contributions were made with pretax money, your repayment will be made with after-tax dollars.
Make Money on Items Lying Around the House
One person's trash is another person's treasure. Go through your house and sell unwanted items. Have a garage sale or post items on eBay. Perhaps you'll even find a savings bond hiding in a drawer that is ready to be cashed in!
Receive a Gift
Tax law allows gifts of several thousand dollars a year to be bestowed without tax consequences to either the giver or recipient, and it is not limited to relatives. Check with the IRS to determine the gift-exclusion amount as it is adjusted annually to reflect inflation. If no one is in a position to give you the money, perhaps they will agree to co-sign a loan.