Tips to save for a down payment and the best places to keep it safe.
Money Girl
299 MG How to Save a Down Payment to Buy a Home, Part 1
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Get your copy of the paperback or ebook from your favorite bookseller. A Money Girl reader named Monica asks, "I want to buy a house in a few years. What's the best way to start saving for the down payment and what type of account should I use?" Most people would love to own a home or vacation property of their own, but they don't have enough for a hefty down payment. In this two-part series, I'll tell you how much money you need for a down payment, where to put it, and how to save as quickly as possible to buy the home of your dreams. When you get a mortgage to buy a home, lenders require that you make an upfront investment, which is called a down payment. A typical down payment ranges from 5 to 20 percent of the purchase price. For instance, let's say you find a great place and negotiate with the seller to buy their home for $300,000. If a lender approves you for a loan with 10 percent down, you'd have to pay $30,000 plus additional closing costs out of pocket and borrow the balance of $270,000. So the amount of down payment money you need to save depends on two factors. The purchase price of the home you buy and the percentage required by the lender to pay upfront. The larger your down payment, the smaller your mortgage and monthly payments will be. A huge benefit of paying at least 20 percent down is that you don't have to pay private mortgage insurance or PMI. This is an additional monthly expense you must pay, which protects the lender in case you default or don't make payments as agreed. However, you can cancel PMI if you pay down your mortgage, so you have at least 20 percent equity in your home. For these reasons, paying 20 percent down is the gold standard. But for many people, coming up with that much money is about as easy as running an ultra marathon in the desert. My advice is not to let the 20 percent rule keep you from becoming a homeowner if you find an affordable property that will be a good long-term investment. As you start planning to buy a home, begin with the end in mind. Be realistic about the average home prices where you want to live. Research home listings online at realtor.com or speak with a local real estate professional. Then contact several lenders to ask about their mortgage requirements, so you'll know what to expect when the time is right to make a purchase offer. I did a previous two-part podcast called How to Buy a Home in 10 Steps, which are episodes number 277 and 278. Those shows will give you much more insight on the entire home buying process. How much home you can afford depends on several factors, such as your income and expenses, credit rating, down payment, and the going interest rate for mortgages. A common rule of thumb is that your monthly housing expense should not exceed 25 to 28 percent of your gross income. Also, consider how becoming a homeowner fits into your overall financial goals, such as saving for retirement or a child's education. Never buy a home if the monthly payments would leave you strapped and unable to provide for your financial future. If you're a first-time home buyer, a veteran, have low income, or want to buy property in a rural area, it's possible to qualify for down payment assistance through several programs. There's the Department of Housing and Urban Development, or HUD, the Federal Housing Administration, or FHA, the Department of Veterans Affairs, or VA, and the Department of Agriculture and Rural Development. Plus, there's a database of local homeowner programs. Don't worry, I'll put a link to everything I just mentioned in the show transcript on the Money Girl page at quickanddirtytips.com. Just look for episode number 299 called How to Save a Down Payment to Buy a Home Part 1. The benefits of down payment assistance programs vary depending on their rules and your circumstances, but they offer low or no down payment so it's easier to become a homeowner. But if you are not eligible for assistance, you'll need to accumulate some serious savings to qualify for a mortgage. In part two of this series, we'll cover strategies for saving down payment money and the best places to keep it until you're ready to buy a home. September is a great month for planning. We start thinking about the rest of the year, whether it's back to school, big year-end work projects, holiday plans, or travel. Planning ahead is crucial in life, especially when it comes to what happens when you're gone. Getting life insurance may sound daunting, but policy genius makes the process a breeze. 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Get Ixcel now and money girl listeners can get an exclusive 20% off Ixcel membership when they sign up today at ixl.com/moneygirl. Visit ixl.com/moneygirl to get the most effective learning program out there at the best price. If you want to read a transcript of this show or any other podcast, you'll find all of them on the Money Girl page at quickanddirtytips.com. There's a handy search box so you can type in any financial topic you want to learn about. If you have a money question, there are several ways to reach me. You can post it on the Money Girl Facebook page. Just visit facebook.com and do a search for Money Girl. You can send it via Twitter where my username is @loraatoms. It's L-A-U-R-A-A-D-A-M-S with no space. Or send an email to money@quickanddirtytips.com. And one more thing, my fellow Quick and Dirty Tips podcaster Lisa Marshall has a brand new book you should check out called the Public Speakers Guide to Success in Every Situation. 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