Ready to buy your dream home? Great, but before you can be approved for a mortgage, you’ll need a down payment.
Experts suggest paying 20% of a home’s purchase price in cash and upfront – this is also referred to as the down payment. Your mortgage finances the remaining 80% of the purchase price. And while 20% may not seem like a lot of cash if you’re buying a new car, it’s a large amount to come out of your bank account at once: $50,000 for a home priced at $250,000, $70,000 for a house that sells for $350,000, and a full $100,000 if you buy a $500,000 property.
Well, most of us don’t have that type of cash saved in our invested retirement accounts, much less laying around in a savings account in cash.
Ways to Consider Saving for a Down Payment
Calculate how much and how fast you want to save.
Consider the price of the house you can afford and determine 20% of the value. This becomes your goal. For instance, if the home is $50,000, divide that number by your time horizon. If you want to buy in five years, divide by five — you’ll need to save $10,000 per year. Divide that number by 12, and you’ll get your target monthly savings goal: $834.
Sounds good, but not necessarily easy. Maybe you want to buy a home like yesterday. You can shorten your time horizon by saving more money each month, but that may not be possible with your current budget. Or maybe $834 per month for five years just isn’t doable period. Either way, here’s the good news: People get enough money for a down payment through various methods.
Start small to save big
Even small contributions can add up over time, so be aware and look for ways to cut expenses or save more — and shift that cash to your down payment fund immediately.
Invest dollars vs. saving
If you don’t plan to buy a home within the next five years, consider making your money work for you. This means going from saving in cash to investing in the market.
To keep this important fact in mind: You only want to invest your down payment cash if you can handle the risk of losing some (or perhaps all) of it. You can’t enjoy returns without risk, and no investment is guaranteed to make money. Therefore, it’s important to have a longer time horizon; it gives you a chance to ride out market volatility and can decrease the chance of possibly hindering your financial goals.
Go into your nest egg.
This idea comes with caution: Pulling money from a retirement account for a down payment shouldn’t be your first choice. To get the most from your retirement savings, you need to contribute to accounts such as your 401(k) and Roth IRA and leave that money alone until you retire.
You can withdraw your contributions from a Roth IRA at any time without penalty or tax. You can also withdraw up to $10,000 of earnings without any kind of penalty if you’ve had the account for at least five years and use the funds to purchase or repair your first home.
Discuss this with a knowledgeable third party about retirement withdrawals before you start dipping into any part of your nest egg. A certified financial planner will be able to discuss the ins and outs of removing funds from retirement accounts and discuss potential consequences to help you make the best decision for how to save for a down payment on a new home.