One of the most important steps in buying a house is saving enough money for a down payment. Depending on the type of mortgage you obtain, you could have to put down as much as 20 percent, or significantly less. Even if your lender only requires you to put a small percentage of the purchase price down, that will still total thousands of dollars. There are many ways to come up with the money.
Seek Government Help
The federal government and many states offer down payment assistance programs. Rules and amounts available depend on location, the size of the loan and the buyer’s financial circumstances.
Beef Up Your Savings Account
A small amount of money, if set aside consistently each time you get paid, can add up over time. The key is to transfer money to a savings account no matter what. If you don’t have the discipline to do that yourself, set up automatic transfers.
If you expect to get a tax refund or year-end bonus, resolve to use it for a down payment. You can use part of it to reward yourself, but focus on your long-term goal of owning a home.
Pay Off Debt
If you have credit card balances with high interest rates, you are probably paying thousands of dollars per year in interest. That is money that could be used to fund a down payment on a home. Create a plan to pay off your credit card bills as soon as possible. That could mean cutting expenses, working overtime, getting a second job, paying a little more toward your credit card bills each month, consolidating your balances, or taking out a loan with a lower interest rate.
Once you have eliminated your debt and interest payments, the money you had been putting toward those bills each month can be devoted to saving for a down payment. Paying off credit card debt can also improve your credit score and help you get a lower interest rate when you apply for a mortgage.
Tap Into Retirement Funds
In some cases, you might be able to withdraw money from an IRA to fund a down payment on a house. Depending on the type of account you have, you might have to pay taxes and penalties. If you have a 401(k), you can borrow money to buy a house, but you will have to pay it back with interest. Any money that you withdraw from your retirement savings won’t be able to accrue interest, so think carefully before choosing one of these options, especially if you’re getting close to retirement age.
Figure Out a Strategy
Saving money for a down payment can feel overwhelming. It may take several years, depending on your price range and financial circumstances. Explore your options and come up with a plan, preferably one that combines a variety of approaches.