Owning a home instead of renting is often a wise financial move. The biggest financial hurdle you face before you can buy a home is gathering cash for the down payment. Saving for a down payment requires financial discipline and a bit of time, but it is necessary to achieve the dream of homeownership.
How Much Do You Need for a Down Payment?
If you can manage it, your target down payment should be 20 percent of the purchase price of your home. That way, you can avoid having to pay private mortgage insurance (PMI), which will save you thousands of dollars over the course of your loan. You can also qualify for lower interest rates on your mortgage when you put 20 percent down. Moreover, the more money you put down, the more equity you will have in your home right away.
What are Available Sources of Down Payment Funds?
Your income and any existing savings can make up all or part of your down payment. However, you should also consider other possible sources of money for your down payment:
- Grants: Grants may be available from your city, your employer and even your bank. Grants are especially common for first-time homebuyers.
- Retirement Accounts: You can borrow or withdraw from your retirement accounts. Many employers allow you to borrow from your 401(k) at no cost, but you must pay yourself back with interest. If you have an IRA, you may be able to withdraw money with no early withdrawal penalties if you are using it to purchase your first home but remember that you will reduce your retirement savings if you do this.
- Family: Depending on the type of mortgage and your financial situation, some or all of your down payment can be gifted from a family member. Talk to your lender about any limitations and whether you need specific documentation for the cash gift.
Down Payment Savings Strategies
- Set It Aside: Create a separate savings account just for your down payment so you are not tempted to spend it elsewhere. Keep the money safe while also earning interest by putting it in a savings account or CD.
- Earn Extra Money: If you are unable to save for a down payment with your current income, get a part-time job or consider freelance work to earn extra money.
- Liquidate Assets: Gather quick cash for your down payment by selling possessions you do not need. One potentially high-impact transaction is to sell your car and buy a less expensive used car or rely on public transportation.
- Save On Housing: Reduce your current housing costs so you can put some of the money you typically spend on rent toward a down payment. Get a roommate to share living costs or move somewhere less expensive.
- Slash Expenses: The possibilities are endless for cutting your monthly expenses. Try to eat out less, buy fewer clothes or cut the cord.