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8 tips for saving a down payment

Lenders want more skin in the game these days before OK'ing your mortgage. But saving for that down payment doesn't have to be that daunting.

By Smart Spending Editor Jun 5, 2013 4:56PM
This post is from Jeffrey Trull at partner site DoughRoller.

MSN Money PartnerDown payments require some serious cash. Even a bare-minimum 5% down payment on a conventional loan means coming up with about $9,800 for the current median home sale price, listed on Zillow.com, of $196,100. And that’s before adding in closing costs.

Image: Woman counting money (© Jose Luis Pelaez, Inc/Blend Images/Getty Images)You probably don’t want to wait forever while you chip away at a down payment. So, while much of the standard advice for saving money still works, you may want to take more drastic measures to save a down payment quickly.


If you’re working to save money for a down payment, here are tips to make it happen faster and easier.


1. Open a separate savings account

Having a separate savings account for your down payment is useful for a couple of reasons. Your down payment won’t be mixed with other funds and spent accidentally. It’s also easier to track your progress; just look at the account balance.


Many high-yield savings accounts, such as Ally and Capital One 360, are free to open and allow automatically recurring deposits. Plus, you can earn interest on your deposits, which can add to your savings.


2. Set a date for your savings goal

A clear-cut strategy to accomplish your saving goal is to use simple math based on dates and amounts saved. Once you've figured out how large a down payment is needed:

  1. Determine how much you can reliably put into savings on a weekly, bi-weekly or monthly basis. Ideally, this coincides with your payday.
  2. Divide your down payment amount by the regular deposit amount to determine how long it will take to save. Or use a goal savings calculator to test the numbers.
  3. If you’re not happy with the current time frame, you’ll need to save more to move it up.

Now that you know what you need to save, here’s how to do it.


3. Decrease other debt payments

If you’re diligent about paying off debt and tend to make extra payments, you may want to consider scaling back and put that money toward your down payment instead.

Assuming that saving for a down payment is your top financial priority, you might not mind paying extra in interest if it means more savings for a down payment.


If you hold federal student loans, consider consolidating and changing the repayment terms.


For example, choosing the extended repayment plan for federal loans can reduce monthly payments by extending your term to 25 years. Take the savings from the monthly payment and funnel it into your down payment account.


4. Borrow from a retirement plan

Although taking money out of your retirement plan can be a bad idea in the long term, certain retirement plans have built-in benefits to do this.


You can also borrow up to $50,000 from a 401(k), typically up to half of your vested amount.

First-time homebuyers can withdraw up to $10,000 from IRA accounts without penalty  This is a big advantage, because you’re typically subject to a 10% penalty on anything you withdraw pre-retirement age.


Traditional IRA holders will still have to pay any applicable taxes on their withdrawal. With Roth IRAs, the funds can be removed penalty free, but dealing with taxes can be a little more complicated. Be sure to check your tax liability or consult a tax professional in these cases.

If this approach interests you, check out our detailed article on How to Use Retirement Savings to Buy a House.


5. Check your credit early

Your credit score is a major factor when it comes to home mortgages. It’s the difference between the best interest rate, a good interest rate, or being turned down for a mortgage.


Check your credit score at least several months before applying for a mortgage. If your score is less than excellent, work to increase your credit score as you save for a down payment.


If you’re required to buy private mortgage insurance because you put down less than 20%, having a higher credit score can reduce the cost of this coverage, too.



6. Use cash windfalls

Every now and then, a chunk of money falls into your lap. For many, this could be every tax season once the refund comes in. You might also inherit money or sell property that brings in some cash.


Direct this money into your down payment savings instead of spending it. The average tax refund of just less than $3,000 is a nice chunk of money that could take months to save if you’re only taking a little from each paycheck.


7. Find savings in your budget

The most direct way to start saving money is to check your budget and start trimming wherever you can.


Saving within your budget really depends on how badly you want to save a down payment. Are you willing to cut out restaurants, vacations and other big expenses until you get your house?


It’s not solely about eliminating expenses, it’s about finding ways to save on things you must spend on. Expenses like insurance rates can be negotiated and lowered, providing decent savings that can be banked toward a down payment.


Don’t rule out drastic measures, like living without a car or going from two cars to one. It’s radical, but it can save thousands of dollars a year by cutting out car payments, insurance, gas, repairs and taxes.


8. Leave some cash behind

Even if saving a down payment is your top goal, putting too much of your savings toward a down payment can be dangerous. When emergencies arise, like injury or a lost job, you’ll need some money to fall back on.


Leave your emergency fund untouched, or you might risk losing your newly bought home to foreclosure if you can’t make the monthly payments.


More from DoughRoller:

1Comment
Jun 6, 2013 9:49AM
avatar
For me, opening a 2nd account wasn't the secret.  I became a good saver when I began making automatic monthly purchases of securities.  After a while, you tend to think of it as a bill you have to pay and it helps you live beneath your means.
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