(Newswire.net — September 23, 2017) — Many first-time homebuyers look at the task of buying a house from the wrong angle. They assume that just because they can qualify for a 3.5- or 5-percent down mortgage, this is their best option. The truth is that there are tons of benefits associated with making larger down payments.
As a rule of thumb, it’s always smart to make at least a 20 percent down payment (and more is better). When you pay 20-down, you’ll not only find it easier to get a lower interest rate, but your monthly payments will also be lower and you won’t be required to pay for private mortgage insurance (which can cost thousands of dollars per year).
5 Tips for Increasing Down Payment Size
Going from a 5 percent down payment to a 20 percent down payment will require you to shift your thinking and get serious about saving money. It might take a couple more years to reach your goal of buying a house, but the following tips will help you save up some money.
1. Slash Your Expenses
The very first thing you need to do is evaluate your household budget and slash whatever expenses aren’t necessary. If you’re like most people, you’ll be surprised by how much you’re spending on things you don’t really need.
For example, by simply cutting cable, eating out at restaurants, online shopping, and a couple of other discretionary expenses, you could save $1,000 or more per month. That’s $12,000-plus per year without earning a penny more.
2. Increase Your Income
If you want your down payment savings to take off, then you should also look for ways to increase your income. This could look like taking on extra work at your current job, setting your sights on a promotion, or picking up an additional side job (like driving for Uber).
3. Automate Savings
“If you’re forgetful or don’t have the self-discipline to transfer the money you save every month, consider setting up an automated system,” Green Residential suggests. “You might allocate a certain percentage or a flat dollar amount towards a designated savings account each month.”
By taking money directly out of your paycheck, you eliminate the temptation of skipping a month of saving or using that money on something else. This will keep you grounded and ensure you meet your savings goal in a timely manner.
4. Sell Things
How badly do you really want to buy a house? Would you be willing to sell a few things in order to increase the size of your down payment? Many people find that they’re able to sell items and put a pretty good dent into their savings goals.
One thing a lot of people do is sell their expensive car and buy a cheaper one. The savings – whether in the form of cash or monthly payments – can be applied to the down payment fund and accelerate the timeline.
5. Tap Your IRA
While it’s rarely a good idea to tap into your retirement, there is one exception that might make sense for you. If you’re a first-time homebuyer, the IRS allows you to use up to $10,000 in IRA funds as part of a down payment. And if you have a spouse who is also a first-time buyer, they can also use up to $10,000. This means you could potentially pull $20,000 from IRA accounts without penalties.
Don’t Rush Into a Purchase
There is no bigger financial mistake than to rush into buying a home. A premature investment in real estate will wreak havoc on your personal finances and haunt you for years to come. Take your time, save up enough money for a large down payment, and then start looking for houses that fit your budget. When the process is finished, you’ll be glad you waited.