Down payments are considered to be a headache by many aspiring homeowners – and not without reason either. A down payment is basically the initial amount that a seller wants you to pay upfront when you purchase a home. The remaining amount of the purchase price is paid by your mortgage loan. Since most first-time homeowners are already cash-strapped, paying a hefty amount initially is a major factor that they have to consider. We bring to you some advice on how to put together this crucial initial amount known as a down payment.
How to Save for a Down Payment
- Savings accounts are one of the simplest and even the most obvious of ways to prepare yourself for the down-payment. Make sure that the size of this account keeps growing by setting aside regular amounts to be deposited in there.
- In cases where there is a low down payment, you may be required to pay mortgage insurance. There are many institutions that can assist you in this regard. The FHA offers 3.5% down payment mortgages and it is very easy to qualify for one. Similarly, institutions supported by the government such as Freddie Mac and Fannie Mae can also help pay mortgages.
- Automatic transfers are a great way to ensure that your cash ends up in your savings account and not in the pockets of your favorite bartender. The service makes automatic payments to your savings account which makes the voluntary process mandatory.
- Save up on small things – eat out fewer times a month, save your raises and bonuses and most importantly, cut down on unnecessary expenses. While this may seem like obvious, it’s where most of us have the hardest time saving money. Also, don’t let go of cash rebates but hold on to them, ask your bank if they can round up all amounts and direct remaining change to the savings account.
- Establish a budget for down payment – we assume that you are old enough to make one since you are getting your own house. A budget allows you to know where your money is going. Once that gets done, you know where you are blowing your hard-earned cash and savings could be made.
- Know your options. Too many of us jump into mortgages and loans without really understanding the intricacies of what we are getting into. Calculate whether you earn enough to keep up with the monthly payments. Understand the relevant interest rates so that you can figure out what sort of a loan you could afford and what is the cheapest way to go about. Knowledge is power – and you need plenty of it in this situation.
- IRA accounts can also be utilized, although it’s something many professionals don’t recommend. In principle, a person is allowed to withdraw $10,000 from their IRA fund for a first-time home purchase. Appealing as it may sound, make sure that you will require a great degree of thrift and control to replenish your IR account once the withdrawal has been made – this is precisely the reason why we don’t recommend this plan to people who are bad at saving.
Why are Down Payments Required
Down payments on real estate are required in order to protect the lender in case you default on your mortgage payments or the property goes into foreclosure. The risk of losing this down payment money may give the home owner added incentive to keep up with the mortgage payments. The higher the down payment, the lower the interest rate and monthly payments may be when getting a loan. For more information on real estate down payment, contact our real estate professionals today!