Making a Down Payment on a Home
A lot goes into buying a home, but one of the biggest hurdles for many is saving enough for a down payment.
What is a Down Payment?
A down payment is a percentage of the home’s purchase price that you pay upfront. In other words, the down payment is the part of what you pay to buy a house that is not included in your loan amount; instead, you owe it at the time of the purchase. The amount that you’ll need to pay is determined by the type of loan you take out and the lender you borrow from. The down payment for a home is usually at least 10% of the total purchase price. If you pay less than 20%, you’ll likely be required to buy private mortgage insurance (PMI). PMI protects the mortgage lender in case you become unable to make your payments.
If saving up to at least 10% doesn’t feel possible, programs like those run by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA) can allow you to pay a smaller percentage or sometimes no down payment at all. Your lender will be able to tell you about any special programs that you may qualify for. You can also do some research online to find a program that may suit your situation, starting with the US Department of Housing and Urban Development website.
Getting the Funds
Getting your hands on 20% or even 10% of your total mortgage is challenging. Start by reevaluating your budget. Make a specific goal to save for your down payment. Adjust your budget to trim excess spending and dedicate those funds toward your goal instead. Consider opening a savings account specifically to save for a down payment.
Investments and high-interest savings accounts can make it easier to get the money you need for a down payment but, of course, these options come with different levels of risk and possible reward. If you choose to invest, timing is a major consideration. The sooner you plan to buy, the fewer risks you’ll likely want to take. But a less risky, price-stable investment is also less likely to provide large earnings. One technique is to split up the money you’re accumulating. You can put part of your money in more risky mutual funds and stocks to try to earn more. The rest you can keep in more conservative interest-bearing investments, such as certificates of deposit (CDs) or US Treasury bills, where you don’t risk losing your investment. You’ll want to be careful to ensure that you set these options to mature around when you plan to buy, otherwise you may lose out on the interest you earned.
One approach that may help is to set specific goals when it comes to investing. Rather than buying stock and sitting on it to see how high it will go, you buy with the intent to sell as soon as it has increased by a certain percentage, say 15%. Once your investment reaches that specified level of increase, you sell, deposit your profit into a savings account, and reinvest the principal in another stock. Of course, there’s no guarantee that the stock will reach your specified percentage of increase within your timeline, or even increase at all, so this method still requires a certain level of risk.
At Monson Savings Bank, it is important to us to help you and your family reach financial goals in order to achieve your life goals, like purchasing a home. Monson Savings Bank’s residential lending experts are ready to help you purchase a home. Our quick, local decision-making and lending processing, combined with our ability to offer you flexible repayment terms to fit your budget, allow for our team to make the home buying process less stressful for you.
Contact one of our residential lenders or apply online today!
