Even when you've decided you can afford to buy a home; you still have a decision to make regarding the down payment. There are quite a few things to consider.
Often, to get the best mortgage interest rate possible, a borrower of a home loan must put down 20 percent of the home's purchase price. Though there are down-payment options of 10 percent and lower, those options usually come with private mortgage insurance, which can tack on hundreds of dollars to your monthly payment.
So it helps to come up with as much as you can for a down payment, and it usually ends up costing you less in the long run. If you're looking to buy a home, here are five ways to put together a down payment.
Dedicate and automate
If you have a savings account with your bank or credit union, maybe that's where you're socking away your down payment money. But what else is that savings account earmarked for?
If it's also a rainy-day fund or vacation savings, your down-payment money can get lost in the shuffle. An easier, somewhat painless way to save might be to open an account specifically dedicated to your down payment. If you can have automatic deposits come out of your paycheck, you might not even notice it's gone.
By taking advantage of automatic transfers to a dedicated account, you can build a down payment.
Sell your stuff
It might sound drastic, but selling some of your things can be an excellent way to scrape together some extra cash. If you're moving anyway, having a yard sale or garage sale can also help you get rid of possessions you might not want to move.
You could also sell items of value you no longer use online: designer clothing, old video game systems, or collectibles. If you have some equity in your car, you could consider downsizing to a less-expensive model and getting what you can for your current ride in the secondary auto market.
Substitute expenses and Spend Smarter
The old standby for personal finance columnists is "give up that daily coffee" when you're saving for something. And while small sacrifices can add up, more considerable sacrifices can get you to your goal much faster.
If you go out on a $100 date night each week, giving that up for a year would net you $5,200. Just cutting back to once a month would put $4,000 back in your pocket. If it seems like a lot to give up, you can try framing it not as a sacrifice but a substitution. You're substituting a year of date nights for the home you can enjoy for years to come.
Of course, you cannot avoid all expenses, but you can save money on your purchases. Take advantage of coupons, cash back apps, and credit card points to maximize savings on your purchases.
Consider your retirement account
Some people withdraw from or borrow from their retirement accounts, both of which can come with tax implications. Using individual retirement account funds - especially employer-sponsored IRAs - should be something you discuss with a qualified tax professional.
Instead of a taxed or penalized withdrawal, you could cut back on your contribution to your IRA for, say, a year. A dual-income household with each earner contributing $1,000 per month to their retirement could save $12,000 before taxes in a year by each cutting their contribution in half.
Whether it makes financial sense to do so depends on several factors such as your age, how much you have saved for retirement, how the account is performing, and more. Again, it's advisable to consult with a finance professional.
Ask your familyLenders will allow homebuyers to accept cash gifts toward the down payment on a home, as long as you meet several criteria. There must be a letter that documents that the money is a gift, not a loan. The funds must come from immediate or close family members or those about to become family members through marriage.
A gift for a down payment doesn't have tax implications for the recipient, but it can for the giver of the gift. Consulting a tax professional is advised.
The Bottom Line
A higher down payment usually saves homebuyers money in the long run, and there are several ways to boost your down-payment savings reasonably quickly.
