When you make the decision to purchase a home, it can feel like there are a million things to plan for but there’s really just a handful that will get you on track. One of the first steps is saving money for a down payment.
How much do you need to save? Where’s the right place to keep your money ? Read on for five tips that will help you plan for this exciting part of your future.
Tip #1: Determine how much you need
When it comes to down payments, the percentage most often referred to is 20% – meaning the buyer provides a down payment equal to 20% of the home’s sale price and the lender provides the other 80%. Even with the benefits of 20% down, it’s not always practical or even the right way to approach your first home.
20% down will allow you to avoid mortgage Insurance – often referred to as PMI (Private Mortgage Insurance) This insurance provides a level of protection for the Lender in the case of a default and can add a few hundred dollar a month to your payments. While this insurance is often required for loans with less than 20% down , it also allows buyers to jump into the market sooner with as little as 3% down and locking in today’s market price. With some areas experiencing 10%+ price increases per year, it may make more sense to buy sooner than later. PMI is usually removable after a period of time. Check with your lenders policy.
Tip #2: Choose a Smart Savings Location
A down payment represents a significant sum of money. Where should you keep it? Unless you’ve got a high appetite for risk or you’re planning to save up slowly over a number of years, it’s probably wise to steer clear of an investment account that can fluctuate in value. Instead, a traditional savings account is usually a good option.
Tip #3: Improve Your Credit Score
A higher credit score will help your secure a better mortgage. If home buying is on the horizon, find out your credit score by requesting one through the credit bureaus or by checking your HUECU credit card statements which now provide you with updated score information. A homebuyer should aim for a score of 700 or above. The quickest way to improve your credit score is by creating a history of timely payments of credit cards, auto loans/leases and student loans. Utilities and rent are important to have up to date but they don’t always get calculated in your credit score.
Tip #4: Automate Your Savings
Make saving for a down payment easier, by making it automatic! Many credit unions and banks offer automated savings accounts designed to help you save for specific expenses such as holiday shopping, vacations, or a down payment on a home. You can set up your account so that regular contributions are made via a payroll deduction or another kind of direct deposit – so you’re saving money, without even thinking about it
Tip #5: Explore All Your Options
The government often provides tax incentives and allowances to first time home buyers. Most 401K and 403B plans have borrowing ability or even tax free withdrawals for first time buyers – check your plans policy and always consult a tax professional before making these decisions.
Many Lenders will also offer a discounted rate for certain purchases. HUECU currently offers a discounted interest rate to our members buying their first home. Check in with one of HUECU Mortgage Loan Officers to learn more about current home buying incentives.