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Saving Plan for a Down Payment on a House

With required down payments on homes ranging from 4 to 20% it's no surprise that many people need advice to save money for a down payment. Keep in mind that, although it's sometimes possible to get a mortgage with 0% down, doing so puts the homeowner in a bad position because they'll be receiving a larger interest rate on their loan and paying much more in monthly payments as a result. For this reason we'll discard the possibility of purchasing a home with no down payment. 20% is the most commonly referred to down payment amount and there's a reason. At 20%, many lenders do not require borrowers to purchase mortgage insurance. The average home price in the United States is around $200,000. That's $40,000 required for a 20% down payment! So how do you save up such a large amount of money in the shortest amount of time possible?

A smart savings plan plan for a down payment on a house is the key. Before organizing your savings plan you must take an in-depth look at your financial situation, however. Analyze all of your assets and liabilities and come up with an accurate budget to plan how much you can realistically save each month. Many people make the mistake of assuming a monthly savings amount that they can't reach. Others aim too low, setting aside a paltry amount of money each month compared to their earnings. That's why a budget and asset analysis is the best first step to any savings plan.

Once you have a good idea of your assets they must be subtracted from the money you need to purchase a home. Assets include current savings, CDs, expected inheritance or gifts and invested income. This number gives you a good idea how much money you'll need to save for a down payment. Next, create a cash flow budget to find out exactly what you can save each month. Plan to sacrifice some non-essential expenses that can save you big.

Lastly, don't let your money sit around while saving up for a down payment. If you have a few years before you plan to purchase a home consider putting your savings in a high-yield savings or money market account. These accounts allow you to earn interest while you wait. Certificates of deposit, or CDs, are also a common option because they can give you the flexibility to take out your money if you need it.

You may find yourself unable to save a down payment in time to purchase a home or worried about rising home costs and interest rates. If this is the case, don't worry. There are a number of options available to you, including down payment assistance. Many state housing authorities can provide assistance to first-time homebuyers, as well as low income families. You can also turn to the Federal Housing Authority or the Veteran's Administration for down payment assistance. The U.S. Department of Agriculture's Rural Housing Service is of particular help to anyone considering a home in a rural area of the country. These resources are absolutely invaluable because, along with offering low interest rates, they can actually help families get mortgages with lowered down payment requirements.

If you're still unable to get a down payment together for a home you can consider turning to your 401(k). Many 401(k) plans allow holders to borrow money as a loan that will be paid back over years. The loan is usually capped at $50,000 (or 50% of your balance). This approach may be helpful to some but it should be cautioned that it comes with risks. For example, termination from your job will make the entire loan balance due in 90 days.

There are a number of means available to potential homebuyers today. Remember to build a proper savings plan and realistic budget before turning to other options as a good savings plan can help you realize your down payment goal sooner than you think.