One of the most important steps associated with purchasing a home is saving money for a down payment. Luckily, there are many ways to make your money work for you so you can attain your goal of homeownership.
How Much is Enough?
There are many ways to determine how much money you’ll need for a down payment. Different mortgage programs require different amounts for a down payment. For instance, if you qualify for a FHA home loan, you can purchase a house with 3.5% down. In addition, many lenders and other mortgage programs will allow a down payment as low as 5% of the purchase price of the home.
If you are financially able to put 20% down, it can be beneficial. At this point lenders will not require you to purchase Private Mortgage Insurance (PMI). PMI is an additional cost built into your mortgage that protects the lender in the event of a default. Work with your lender to determine what amount will be best for you.
Determine how much you want to spend on a home. Call your lender to discuss what fits with your financial situation or get prequalified to see what mortgage program best works for you. Once you’ve determined the total home price that fits in your budget, you’ll get a better sense of the amount you’ll need to save for a down payment.
Determine when you would like to buy a home. Depending on your situation, you may need to allow two to three years to give yourself enough time to save. Keep in mind that you’ll need to save money not only for a down payment, but also for closing costs and monthly mortgage payments.
Analyze your current financial position. This includes reviewing all assets and liabilities, developing a budget and planning how much to save each month. When analyzing total current assets, don’t overlook any source of funds. In addition to all checking and savings accounts, you may have certificates of deposit, stocks, mutual funds and savings bonds. Retirement funds such as a 401(k) or an IRA can also be considered. Talk with a tax advisor for more information.
Spend Less, Save More
So you know you need the money for a down payment, but how will you go about saving the money? Here are some tips to make sure you’re saving for your goal of homeownership.
Pay Yourself First. Make saving a priority by setting aside a certain amount each month. If you have trouble leaving the money in your savings account, consider setting up a separate savings account. Once you put the money into savings, consider it untouchable until you use it for your down payment.
Set Up an Automatic Transfer & Direct Deposit. Consider having money automatically transferred to your savings account each month. Many institutions allow you to set up recurring transfers online as well. You could also consider having a portion of your paycheck direct deposited into your savings account. If you never see the money, you are less likely to miss it or to transfer out of your savings account.
Cut Back on Your Spending. Choose one item to give up or cut back on and put that money in the bank. This item could be a small expense that tends to adds up quickly like daily lattes or cappuccinos. Or it could be a more expensive luxury such as your weekly massage. If you cut back or quit altogether, you will find the savings do add up.
Make Your Money Work for You
Invest what you do have in a certificate of deposit or high-yield savings account. Do research to find an option that will fit into your timeline for purchasing your new home.
Contribute to an IRA. The IRS allows you to take up to $10,000 out of your IRA to use as a down payment on a home.* Check with a tax advisor to find out if you qualify for this option and if it can work for you.
Work additional hours, if you have the option to. Consider working enough overtime to cover your savings goal. Get a second job or do freelance work to earn more money. Take a skill you already have and find a way to share it with others. For example, if you’re a teacher, consider tutoring. Use your creativity and consider where your skills could meet a need in your community.
About UW Credit Union
This information is provided to you courtesy of UW Credit Union, based in Madison, WI. UW Credit Union is a leading provider of home loans in Dane County and throughout Wisconsin.
For more information about the home loan process, please contact a UW Credit Union Home Loan Specialist at 800.533.6773, ext. 2810, or vist UWCU.org.