by Eric Volkman | Dec. 10, 2018
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We're inside a long-growing economy fueled by low interest rates, which has pushed home prices ever skyward. My county of Los Angeles notched an all-time high this summer, with the median price tag coming in just above $615,000 -- and this in a region with a lot of bad housing stock in unattractive neighborhoods.
Most mortgage lenders expect borrowers to put up a down payment of at least 20% of the sale price; in the above case, that would require in excess of $123,000. Even a family with above-average income can easily have trouble coming up with that kind of money. In that spirit, here are five methods you can use to help you reach this important financial goal.
One way or another, you leave money aside for your most common expenses (rent, gas, Starbucks, etc.). It's time to create a new category -- down payment savings. Consider plowing a certain amount of your income every month to an account that not only preserves the money you put into it, but earns interest while doing so.
There are several bank account types that will accomplish this. The most aggressive "lock-and-save" option is the certificate of deposit (CD), which typically has steep penalties for early withdrawal.
Money market and savings accounts are more forgiving, but they generally earn less interest. Also, since they're more flexible with transfers and withdrawals, you may be more tempted to dip into their funds.
No matter your economic situation, a home is an asset that will take over your life for the next few years (if not much longer). Since it will almost certainly be the most valuable object you own, in order to save for a down payment on it you should consider selling other assets.
There are a great many goods that can be sold off if you don't consider them absolutely essential -- at least, essential enough to delay achieving your down payment target. These include but are by no means limited to:
Stocks and other securities -- This category also covers mutual funds, bonds, stock options, etc.
Collectibles -- a great many collectibles have value. Examples of products that can potentially sell for a worthy sum are:
Vehicles -- Are you in a two-car family? Perhaps it's possible to consolidate your brood's transportation needs into only one of those automobiles, and sell the other. Better, if you own but don't necessarily need a vintage car, it might fetch a handsome price if well maintained.
Naturally it's good to put money away for retirement, or devote some to a 401(k) plan. But the benefits of these programs are usually quite some distance in the future, while that home you want needs financing soon.
Consider, then, either diverting some (or even all) of your regular allotment to these accounts. If your need for a down payment is more urgent, it might be advisable to drain funds -- again, either some or all -- from such instruments, as long as doing so doesn't incur overly stiff penalties.
Although few of us want to shut off the taps for future savings, a temporary halt shouldn't be too painful in the long run. Once your down payment is met and you re-adjust your budget to include your mortgage, you can hopefully find some room for fresh payments into these accounts.
When in doubt, cut it out. Saving for an asset that's as expensive as a home these days can require sacrifice.
Think of the many things you spend money on that aren't essentials -- even the most frugal of us have extravagances we can do without. You don't really need that daily grande latte, for example, or your regular Friday night at the bar knocking down beers with friends.
Why not park the resulting savings into the aforementioned savings vehicle of your choice, be it a money market account, a CD, or even that special space under the mattress? Even a moderate level of snipping on the leisure budget here and there can add to that growing down payment pile.
Since having a home of one's own is, famously, the American Dream, there are numerous entities willing to lend a helping hand with down payment assistance programs.
These can bring down the cost of securing a mortgage down significantly. Some initiatives allow you to obtain a loan for as low as 3% of the price of the home, which is far more affordable than the 20% traditional level mentioned above.
Happily, there are numerous federal and state down payment assistance programs; certain banks and other financial services companies also run their own programs. Requirements for these programs vary -- typically, the deciding factors are credit score, income, and price of the desired home.
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