So you’ve finally decided that you’re ready to purchase a home. You’ve even been pre-approved for a loan. However, there’s still one challenge awaiting you: How to come up with enough money to make a down payment.
The Importance of the Down Payment
As you probably know, most people need to use a mortgage in order to purchase a home. When you take out a mortgage, you put down a certain amount of money and then the bank pays for the rest. You’re then responsible for paying back the loan over a period of many years.
The money you put down is known as a down payment. The bigger the down payment, the lower your monthly payments. While some loans only require as little as 3.5 percent down, savvy financial advisors will always suggest putting down 20 percent.
Aside from lowering the principal payment on the loan, making a 20 percent payment helps you avoid paying for private mortgage insurance (PMI), which protects the lender in case you default. Generally speaking, PMI costs 1 percent of the total loan per year. So, for a $200,000 loan, you’d pay $2,000 per year in PMI (roughly $166 per month).
4 Tips to Come Up With a Hefty Down Payment
Coming up with a 20 percent down payment can seem impossible. That’s $40,000 on a $200,000 home. However, with a little ambition, creativity, and patience, you can do it.
Here are some tips to help you along:
1. Slash Expenses
When trying to save money, your budget is the first thing you should evaluate. Most people have some excess fat that can be trimmed off their budget. It might be in the form of eating out, shopping on the weekends, paying for cable, or overspending on car insurance. Eliminating a few hundred dollars per month could make a big difference in the amount you’re able to save over the course of a year.
2. Pick Up Odd Jobs
In addition to slashing expenses, you should look for ways to increase your income. This could look like picking up extra shifts at work, doing freelance work on the side, or picking up odd jobs – such as driving for Uber on the weekends or delivering pizza at night.
3. Sell Something of Value
Cutting expenses and increasing income are great, but it takes months and months to accumulate enough cash to make a dent in your 20 percent down payment. One way to accelerate your saving is to sell something of value. This could be a collection, a car, a piece of artwork, or a piece of jewelry.
4. Use an Assistance Program
Have you looked into assistance programs to see if there’s money you qualify for? You’d be surprised by how many options are out there.
“There are hundreds of millions of dollars available for down payment assistance right where you live. Many government agencies at the state, county, and city level provide financial assistance for people in their communities who are well qualified and ready for homeownership,” OnQFinancial explains. “Homebuyers with little money for a down payment are also finding more home loans available with a low down payment or in some circumstances, no down payment.”
Be a Financially Savvy Homeowner
When you put 20 percent into a home, you’re telling yourself that you’re serious about becoming a homeowner. You have more skin in the game, which means you’ll be more serious about taking care of your investment. And while it’ll take some time for the average person to save up a 20 percent down payment, it’s well worth it.