Without loans, we wouldn’t be able to make large, essential purchases for things like a house. With just a few thousand down, you can get a couple hundred thousand dollars to purchase your first home.
Before taking out the loan, however, you should understand your down payment. There are ways that you can purchase a home with only a few thousand dollars or even no down payment at all. However, you’ll be saddled with high interest rates that will have you paying tens of thousands extra on your home in the long run.
To get the very lowest interest rate, you’ll need a down payment of at least 20 percent. If you can save more than that, you’ll be in even better shape. According to Bankrate, the best interest rates are right around 3.4 percent. These are reserved for those with good credit and an adequate down payment. Those with poor credit and a low down payment could pay almost double on their interest, which is tens of thousands of dollars over a 30-year period.
Twenty percent of a home loan is a lot of money. The average home price in the United States is about $200,000. If you’re purchasing a home at this price, an adequate down payment is $40,000 at the time of closing. Do you have that kind of cash lying around?
Most people don’t. In 1975, people saved about 15 percent of their income for things like a home, car, college, and other purchases. Today, the savings rate is less than 5 percent, and many people don’t save at all. There are certain economic factors, as well as habits and behaviors that influence the current saving rate, but it’s resulted in lower and lower down payments from both first time and seasoned home buyers.
If you’re like most Americans, you won’t have nearly that much money saved up on the fly. But that doesn’t mean you can’t get there. With a few tried and true saving hacks, you’ll be well on your way to a great interest rate and a home you love.
Before you start saving, set a goal. This starts by defining the amount of house you can afford. A financial advisor or loan officer would tell you that your housing shouldn’t exceed 30 percent of your income.
That means if you’re making 6,000 per month, you shouldn’t spend more than $1800 a month on your house payment, utilities, and related expenses. When you consider all of the extras, you’ll be looking at a loan of about $200,000 and a down payment of $40,000 minimum. Now you have a number to work towards as you save.
After you’ve defined your goal, set a time limit. You’ll find it’s more motivating to save if there’s a deadline. A common goal is 5 years. If your goal is $50,000, that’s a savings of $10,000 per year.
Depending on your income, you may be able to shorten that time frame to, say, two years. It may require some strict budgeting and savings tactics, but it’s not impossible.
You’re your own worst enemy when it comes to saving for a house. It’s so tempting to pull out the $10,000 you saved last year to buy a new car, pay for college, fund an investment, or cover any other expense. Even if you only pull out a few hundred at a time, it adds up, and you’ll be short on your payment when the time comes.
Your savings should go somewhere where you can’t touch it. You might open a separate savings account in a different bank without debit cards. You can transfer the money from your primary account to that one fairly easily, but it’s more difficult to get the money out for personal use.
If you’re saving over a period of 5 or 10 years, you might also consider a high interest savings account. As you add to it, the interest accrued on the account will add to your overall down payment sum.
If you’re forgetful or don’t have the self-discipline to transfer the money you save every month, consider setting up an automated system. You might allocate a certain percentage or a flat dollar amount towards a designated savings account each month.
Just make sure your account balance is enough for the regular transfer. Try to schedule your automatic payments to follow a paycheck deposit so your transfers won’t overdraft your account.
One of the biggest risks to your savings account is unexpected emergencies while you’re trying to save. If you have car problems, medical expenses, a lost job, or other unexpected costs you can’t cover on your own, you might feel like there’s no choice but to pull from your down payment fund.
You can avoid this by setting up a separate savings account for emergencies. Try saving about three months’ worth of expenses, and use that money to handle the unexpected rather than what’s in your down payment account.
Many people don’t realize that they’re entitled to a first-time homebuyer tax benefit through an IRA account. The dynamics differ a little depending on it being a traditional IRA or a Roth IRA, but the maximum penalty-free distribution is a one-time withdrawal of $10,000 per person.
It is considered taxed income, and it may have a penalty depending on how your account is set up. You’ll want to carefully go over the details before proceeding, but it can offer an excellent boost towards your much-needed down payment.
A good down payment can’t save you from high interest rates if your credit is bad. Those with credit scores less of than 700 will have a very difficult time getting a good rate. If you want to reduce interest payments in the long run, use the time you’re saving for a down payment to improve your credit.
The best tool for improving credit is time. Develop a habit of making payments on rent, credit cards, bills, and other debt for a few years before you purchase a home. After several years, your bad credit items will disappear, and you’ll have the score necessary to get a good loan.
At Green Residential, we have a full service realty team at your disposal. Because we offer a flat rate fee instead of taking a percentage of the sale, we’re often cheaper than other realty services and offer an excellent value.
For more information about how we can help you save on a great house, contact us today!
TREC Broker License # 9001367
CALL US