Whether you’re in the process of buying your first home, an investment property, a vacation home or you’re in the process of rightsizing to something more appropriate, buying real estate is a big financial commitment. One of the best ways you can ensure your monthly mortgage payment is within your financial means is to have as large of a down payment as possible.
Having a significant down payment can reduce your interest rates, increase what you can afford and eliminate the need for private mortgage insurance (PMI).
Buying a house is a huge commitment that requires careful analysis and consideration. One of the biggest ways to impact your future home payments is by having a substantial down payment. An infusion of cash up front can: dramatically reduce your loan rates for your new home, increase the amount of house that you can afford, and sometimes can even affect whether you can get a loan! Having a substantial amount of money available at the beginning can be a barrier for many buyers.
In today’s blog post it’s my goal to cover five easy ways you can secure as large of a down payment as possible.
Extra Hours or Overtime
Depending on your employment situation and just how much money you might be looking to save, you may want to pick up a couple extra hours at work. If you can secure overtime pay, that’s all the better. Failing that, there’s always the option of getting a part time job until you’ve saved up the appropriate amount. You needn’t continue working beyond your goal, but it’ll help you get there that much faster.
Family Loans or Gifts
Parents can gift $13,000 per year to their children without having to pay a gift tax. Whether this is a loan or a gift is up to you and your family, but regardless the terms of the agreement should be spelled out very clearly prior to any sort of transaction to avoid confusion.
If you’re just starting out with your significant other and you’re looking to purchase your first home together, it may be a wise idea to opt for a less fancy honeymoon or wedding and instead suggest wedding guests help you out with a down payment in lieu of gifts.
MassHousing mortgages are designed to increase affordable homeownership for Massachusetts residents . It’s in the state’s best interest to have as many homebuyers as possible, so it’s surprisingly easy to secure MassHousing mortgages if you meet the financial requirements. MassHousing mortgages can provide up to 97% financing, so the borrower would only need a 3% down payment.
IRA or 401k
If you have never purchased residential real estate before you can use up to $10,000 in IRA funds as a down payment. This maximum doubles if you are married and your spouse has an IRA as well. While there isn’t a penalty for early withdrawals of funds you should check with your financial advisor to make sure there are no tax issues.
You can also use 50% of the money from your 401k up to a maximum of $50,000, but this amount is considered a loan and must be repaid.
If you or your spouse is a veteran of the armed services, you may be able to secure a low to zero interest loan from the Department of Veteran Affairs. The VA offers an entitlement of $36,000 to every eligible veteran and will generally loan up to 4 times the available entitlement without a down payment.
Saving & Investing
Likely the most obvious method of ensuring you have a significant down payment is saving. Putting money away on a regular basis is the best way to build for the investment in your new property. Take stock of your daily purchases and think about what you can live without. Take your lunch instead of buying it. Cut the cord on cable and get an antenna or read a book! Take whatever money you would normally spend, even if it’s small, and put it away into an account specifically for your new home.
One you have a sizable bundle, consider opening a certified deposit (CD) with your local bank or credit union. While a CD with a 1 year term won’t give you a huge interest rate, it’ll likely be better than the interest rates available on your regular savings account.