Alternative uses of your down payment if you’ve decided not to buy

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It’s easy to be intimidated when trying to buy a home during this hot real estate market. You might have saved up for the down payment and were ready to buy, only to end up losing in a bidding war or struggling to find the right home for the right price. If you decide to put off buying a home for a while, what do you do with your down payment while you wait?

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Here’s how to make the most of that money to improve your position when you’re finally ready to buy.

Think carefully about your timing

How long you plan to wait before resuming your home search will help you determine the best use of your down payment. If you want to be able to act quickly when the right home arrives, you’ll invest differently than you would if you signed a one-year rental lease and decided to delay for the longer term. “If this is a period of less than 12 months, your best bet is to let the funds continue to grow in your current savings account,” said Gerald Grant III, a certified financial planner and Equitable advisor. in Washington, DC “The most important thing is to have the money available when you are ready to make the purchase.

If you think you want to buy a house in a few months, keep the money in a safe and accessible account that you can tap into quickly if you find the right house – rather than risking it on the stock market or tying it up for the long haul. term deposit certificates.

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“Often times, we’re so focused on growth that we lose sight of the value of peace of mind and access,” Grant said. “Yes, you can try to invest in a vehicle for the longer term, but you run the risk of a possible market reversal at an inopportune time. “

Buy the best interest rate – you can find slightly higher rates at a credit union or online savings account. Considering the large down payment amount, even a small increase in interest rates can make a difference. Keep the money separate from your regular bank account so you won’t be tempted to spend it on other bills.

Build your emergency fund

You can use some of the money to build your emergency fund while you wait. Having that money available for unforeseen expenses can help you avoid finding yourself in high-interest debt that could make it harder to get a mortgage and afford the home. Grant generally recommends having at least three months of spending in an emergency fund before making any investments.

The emergency fund becomes even more important once you become a homeowner and can face many other unforeseen costs, such as having to fix a leaking roof, replace a broken refrigerator, clean up a flooded basement, or remove a tree. grave. It helps to prepare for these potential expenses before you buy the home, rather than getting into financial difficulty if they do occur.

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Pay off the debt

“If you’re in a situation where you’ve saved a lot of money for a down payment but decided to delay buying a home, you might get some of the money saved to pay off your other debts. , especially high interest debt like credit card debt, ”said Jacob Channel, senior economic analyst at LendingTree. “When preparing to buy a home, you’ll usually want to find a balance between increasing your savings and paying off your other debts. “

Paying off debt can help in several ways. Once you pay off high-interest debt, you won’t have to spend that much money on interest each month, and you’ll have more to build up your down payment and pay off your mortgage.

Additionally, part of your credit score is based on your credit utilization rate, which is the amount of available credit you’ve used up (your credit card balances against your credit card limits) . Paying off that debt can help improve your credit score and ultimately help you get a better mortgage rate.

“Using excess cash to pay off other debt instead of just piling it all up for a down payment could help boost a borrower’s credit rating and allow them to get a better rate,” Channel said. “In addition to having better credit, those who pay off other debts before getting a mortgage may find it easier to pay for that mortgage because they have fewer payments to worry about. “

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Invest for the longer term

You can invest the money differently if you don’t plan to buy a home for a longer period of time, especially if you’ve already set up an emergency fund and paid off high-interest debt.

“If your decision is not to buy a home for a few years, now would be a good time to review and reassess your financial goals and priorities,” Grant said. “If you have no debt and have a long enough period of time, you might start to consider short to medium term investments like balanced mutual funds, exchange traded funds, stocks and obligations. This would allow you to still have access to funds and potentially get more growth than your bank account, but the focus would not be on high returns. If you were playing baseball, we would just be trying to get to base; we’re more concerned with singles and doubles than home runs.

Continue to add to your deposit

Once you’ve covered your other bases, you can continue to build your savings as well. “If you have the cash to keep saving and over a long enough period of time, you can take some of the funds, invest them in something more medium to long term, and use your monthly savings to replenish the stake. of funds. Grant said.

Although you can buy a home with a lower down payment, you will usually get the best mortgage rate if you can pay 20% or more.

“A common misconception that many homebuyers have is that they need a 20% down payment to buy a home,” Channel said. “Depending on the type of loan they get as well as other factors like their credit rating, some buyers might even be able to deposit considerably less than 10%. That being said, the more you invest in a down payment, the lower your mortgage rate and monthly payments are likely to be. So while you don’t necessarily need a 20% or more down payment to get a loan, it can be worth putting some money aside.

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Re-evaluate your timing

You may have been burnt out in the heat of the real estate market, but waiting doesn’t always improve things.

“Even for the most seasoned real estate professionals, it’s incredibly difficult to time the market. It’s impossible to predict the future, and there are many instances where people find that waiting only makes things more difficult, ”Channel said. “So if you have the money for a house and you are in a place where you are willing to take on the responsibility of owning a home, then there is nothing wrong with buying now, even if the market is. crazier than usual. . “

If you decide to delay, continue to focus on preparing your finances to buy a home. “If you decide to delay your home buying plans, try to stay proactive while you wait,” Channel said. “Use the time and money you’ve already saved to do things like increase your credit score or reduce your other debt. The more you work on strengthening your finances, the less difficult the home buying process will be. “

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Last updated: October 28, 2021

About the Author

Kimberly Lankford has been a financial journalist for over 20 years. As a columnist for “Ask Kim” at Kiplinger’s Personal Finance magazine, she received hundreds of questions each month from readers on insurance, taxes, retirement planning and other personal finance issues. His financial articles have also appeared in the Washington Post, US News & World Report, AARP Magazine, Boston Globe, PBS Next Avenue, Bloomberg Wealth Manager and Military Officer Magazine, and his syndicated columns have been published regularly in the Chicago Tribune, Denver. Post, Baltimore Sun and other newspapers.

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