| Saving for a Down Payment
Saving for a down payment on a home can be one of
the most challenging tasks a young family faces in the quest for
home ownership. Creating a down payment savings plan and sticking
to it will help potential buyers reach their goal of home ownership
The purchase of a home entails saving for three up-front
costs. The down payment is the largest part and is a percentage
of the total purchase price of the house. As the economy has improved
and home prices have stabilized in recent years, down payment requirements
in New England have dropped considerably. Today, first time home
buyers can purchase a home with a down payment ranging from three
to five percent of the purchase price.
In addition to a down payment, funds are needed to
cover closing costs. Closing costs include all fees required to
execute the sales transaction, such as attorney fees, title insurance,
appraisals, points and tax escrows. While these charges vary considerably,
most home buyers will need at least $3,000 to $5,000 for closing
Finally, home buyers need to show that after paying the down payment
and closing costs they will still have some reserve funds to protect
against short-term cash flow problems. Ideally, a home buyer will
have at least three months' worth of housing payments available
after closing. These funds do not need to be paid out; they simply
remain in the home buyer's savings.
As an example of total cash required, a home buyer
purchasing a $200,000 home with a $1,750 monthly housing payment
would need to have approximately $20,000 available. This includes
$10,000 for a five percent down payment, approximately $5,000 for
closing costs and about $5,000 in payment reserves. After closing,
the home buyer would have $5,000 left over.
For many first time home buyer programs, 2% of the
down payment can be financed along with a portion of the closing
costs, and reserve payment requirements can be reduced. These programs
can decrease cash requirements from over $20,000 down to less than
$12,000 in the same example.
Based on the requirements outlined above, future home
buyers can develop a savings plan that will help them achieve their
goal of home ownership in the near future. Since the down payment
required depends on the purchase price, a home buyer should meet
with a mortgage lending professional to determine how large a mortgage
can be obtained. The maximum loan amount will determine the approximate
price range in which a home buyer should be looking. For example,
a home buyer whose income will support a mortgage of $190,000 can
look for homes with a price of about $200,000 and plan to save a
down payment of about $10,000.
Before starting a savings plan, a future home buyer
needs to determine his or her current financial position. This includes
reviewing all assets and liabilities, developing a budget and planning
how much to save each month. When analyzing total current assets,
a consumer should not overlook any source of funds. In addition
to all checking and savings accounts, many people have CDs, stocks,
mutual funds and savings bonds. Retirement funds such as a 401k
or an IRA can be counted toward the payment reserve requirement.
Some 401k plans even allow employees to borrow against the plan.
Proceeds from borrowing against one's own retirement
funds can be used toward a down payment.
By subtracting all current financial assets from the amount of funds
needed to purchase a home, one can determine how much needs to be
saved. A cash flow budget should then be prepared to determine how
much can realistically be saved monthly. Some sacrifices of non-essential
items may need to be delayed temporarily in order to meet each monthly
goal! No matter how a home buyer accumulates funds to purchase a
home, careful planning will always smooth the road to home ownership.
Article continued at http://www.mortgagealmanac.com/articles/96-savingfordownpayment.html