- Before saving for a down payment, figure out how much you’ll need and set a deadline.
- Automatic deposits can make saving easier, and you can find ways to cut spending to save more.
- You have the option of withdrawing money from your retirement savings, but there are risks involved.
- This article is part of “The Road to Home” series designed to help first-time homebuyers navigate the intimidating and exhilarating process of buying a home.
A down payment on a home is probably one of the most important purchases you’ll ever make, so you should create a plan to set aside enough money to buy the home. Here are some strategies for saving for a down payment.
Set an objective
First, determine how much you need to pay for a lender to approve you for a mortgage. Here is the percentage of the purchase price you will need, organized by type of mortgage:
You’ll also need to factor in closing costs, which typically run into the thousands of dollars.
Find out how much you need to save for a down payment and closing costs, then decide when you want to buy. This will help you determine how much to save each week or month to reach your goal.
Schedule automatic savings
If you receive your paycheck as a direct deposit, you can have your business send a percentage of each check directly into a savings account for the down payment. Or you can use online banking to schedule regular transfers from registration to savings.
The automatic savings strategy ensures that you don’t have to constantly remind yourself to save money.
You may also want to save for the down payment in a high yield savings account, which can also help you earn interest to use towards the purchase.
Consider reducing your expenses
You may find that you are saving too little on your paycheck to meet your down payment goal before the deadline. In that case, think about what expenses you can reduce or eliminate.
If you pay your bank overdraft or your monthly fees, find out if you can waive them. Think about subscription services that you could put on hold and cancel your gym membership if you aren’t using it. Then put that money into savings.
Find ways to earn more
It might be a good time to approach your boss if you know you are waiting for a raise. If you’re willing to put in the time, you could get a second job to generate more income for a few months.
You can take a side gig in your free time, like babysitting or driving for a rideshare service. You can even rent a room in your house with Airbnb. These can be great ways to make more money now, but just be prepared for the implications of tax season.
Look at your retirement accounts
There are rules about when you can withdraw money from your retirement accounts, but there are also exceptions, especially for home buyers.
If you’re a first-time home buyer (what the IRS defines as someone who hasn’t owned a home in the past three years), you can withdraw up to $ 10,000 for a down payment. your traditional IRA. You will not pay a penalty, but you will pay income tax. For a Roth IRA, you can withdraw all the money you contributed (but not the earnings) if your account is at least five years old. You can also withdraw up to $ 10,000 in winnings without paying a penalty.
You can also withdraw funds from your employer retirement account, like a 401 (k), but it’s a bit more difficult and risky.
If you are considering withdrawing money from a retirement account for your down payment, consider whether it is worth losing the money you would earn in compound interest by leaving the funds in the account over. years. You will probably want to speak to a financial expert before withdrawing money from your accounts.