Now I Get It: Down payments

By Nicole Goodkind

April 18, 2016 9:42 AM

Yahoo Finance

So you’ve found your perfect home and you’re ready to move in and make it yours. But there’s one giant hurdle that stands between you and your new sanctuary — the down payment.

If you’re not paying in cash, you’ll probably need to take a mortgage out on your future home, and with that comes a large, upfront deposit — usually 10% to 25% of the total price. The bigger the down payment, the lower your mortgage will be. Ideally you’ll want to put at least 20% down, otherwise you’ll need to pay mortgage insurance, which typically costs around 0.3% to 1.5% of the original loan amount per year.

So if you haven’t started saving, now is the time. Open a dedicated account for your down payment, evaluate your current spending habits and cut unnecessary costs. You might also want to have a certain percentage of your paycheck go directly into the savings account so that you’re not tempted to spend it. If you’re having trouble identifying any extra money to save, you still have options. If you’ve owned a Roth IRA for more than five years and you’re a first-time homebuyer, you can withdraw up to $10,000 tax-free. But remember, you’ll be cutting into your retirement savings.

You can also borrow against your 401(k). You are allowed to take a one-time loan of up to $50,000 or half the value of the account, whichever is less. There’s no tax penalty, and you keep your 401(k) intact, but you’ll still have to make monthly payments with interest. If you still need some extra cash, there are nearly 2,300 down-payment help programs throughout the U.S. that aid low to middle income, first-time homebuyers. In fact, most people who are eligible for these programs receive at least $10,000 in assistance through grants or low-interest loans. Go to see if you’re eligible. Saving for a down payment is tough work, but all of the scrimping and saving will pay off in the end when you’re living in your dream house.

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