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Get A Down Payment Together
Determine the amount
For years, a down payment has traditionally been 20% of the purchase price. Lenders’ requirements have relaxed in recent years, allowing some buyers to put down only 10%. The catch is, many lenders require PMI, if you put down less than 20%. Private Mortage Insurance payments ranged from $50-$100 for a median-priced home according to the Mortgage Companies of America . You can add these premiums to your mortgage, and in some cases, you may be able to take them as a deduction.
Gather the money
Once you know how large a down payment you need, it’s time to assess all options and form a plan. Your choices include:
- Save it yourself.
Pros: Can be painless if you transfer a set amount from your checking account into savings each month. Better yet, you will owe no one.
Cons: Can take a long time, during which housing prices and interest rates may fluctuate. Your plan is also susceptible to getting thrown off track by emergencies.
Takeaway: If you choose this route, set up automatic deductions and put aside as much as you can bear (banking every raise, tax refund, and bonus) to make the process go quickly. - Borrow from family.
Pros: Can be quick, with few paperwork hassles. You may get a more favorable interest rate than you’d get from a bank.
Cons: If your lender finds out, it may result in a higher mortgage interest rate. Lenders will see you as a greater risk than borrowers with their own capital. Plus, mixing family and finances can be emotionally risky.
Takeaway: If you borrow from relatives, create a document that outlines payment terms and a timeline. Have everyone involved sign off. - Borrow from your mortgage company.
Take out two loans -- one for 80% of the purchase price and one for the 20% down payment.
Pros: You avoid PMI since you’ll be putting down 20%.
Cons: If your home’s value declines, you’ll owe more than it is worth. The increase of total interest paid decreases your equity.
Takeaway: Although this route seems painless, its financial risks are high. - Withdraw from an IRA.
If you have a traditional or Roth IRA, you can withdraw money from it to use toward your down payment.
Pros: As long as you haven’t owned a home in two years, you’re excused from paying the 10% penalty that generally applies to withdrawals made before age 59-1/2.
Cons: You can only withdraw a lifetime total of $10,000 (if you are married and your spouse is also a first-time homebuyer, he or she can also withdraw $10,000). And once you do, that money loses its tax-advantaged status.
Takeaway: The rules governing IRAs are complex and subject to change--consult a tax professional before going this route. - Borrow from your 401k.
If you have a employer sponsored 401k, and your employer allows it, you can borrow against it.
Pros: You will be charged interest, but it goes back into your 401k, so you’re paying it to yourself.
Cons: That money won’t earn interest while you’re paying it back. There may be a time limit on repayment. And if you lose your job, switch jobs, or your employer goes out of business, you may be required to pay the money back quickly.
Takeaway: If you feel that your future at the company is secure, this can be a great way to gather money with manageable costs. - Lease to buy option.
You may find a house that you can lease with an option to buy.
Pros: Your lease payments go toward your down payment, essentially acting as “forced savings”.
Cons: If the owner decides not to extend the offer, those lease payments are lost.
Takeaway: Make sure you have a legally sound agreement in place before you choose this route.
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