No surprise here, but buying a home is a huge investment. For most Americans, it is the biggest financial decision they will ever make. So it makes sense to view home buying with a long-term vision. Some experts suggest you need to start planning out at least twelve months before you buy a home. It’s even better to start two years out – or more.
Why is this important?
Well, it comes down to your down payment … actually saving for it. The bigger the down payment you can save, the lower your monthly payments and interest rate will be. That is if you don’t make the mistake of using a large down payment to buy more house than you can afford.
You don’t have a lot of wiggle room in your budget? So, how can you save for a down payment? Here are ten ways you can find cash to help you save for that ever-important down payment.
- Cut your rent in half (or eliminate it)
Your first goal when it comes to saving for a down payment is to lower any current payments. The biggest is probably your current rent.
Think about downsizing to a smaller apartment. Or you could move into an apartment if you’ve been renting a house. If you downsize to a unit that is just $200 cheaper, you can put that money away. In twenty-four months you can save $4,800.
Here’s another option: can you move in with your parents or in-laws for six to twelve months? While this could present difficult living conditions if you have a family of your own, saving anywhere from $500 to $1,000 a month or more can help you sock away a substantial down payment in about a year. It just might be worth the temporary sacrifice.
- Save your tax fund.
Most Americans can expect a tax return each year. It might be a few hundred dollars, or it could be a few thousand dollars. Whatever the amount, the majority of people spend it either of two ways: on something extra like a vacation or paying off debt.
If you owe debt, then yes, it is a good idea to pay off that debt. But for goodness sakes, don’t spend it on a vacation if you have a pressing need. That’s not the time to view it as a windfall.
Instead, look at your tax return as getting some of your hard earned money back … and then invest it in a home. And if you start thinking this year’s return that way, five years of tax refunds could amount to ten or twenty thousand dollars in savings.
- Reduce monthly expenses
There are probably a hundred ways you can reduce monthly expenses (we already talked about a huge one: rent), but here are a few more:
- Use public transit (or car pool) to save on gas and car maintenance
- Sell your car to get out of the monthly payment
- Cancel cable, Direct TV, music subscriptions, and any other entertainment expenses that cost you every month
- Cancel magazine and newspaper subscriptions
- Reduce or get rid of your smart phone plan
- Raise your insurance deductibles
- Cook at home and save tons of money on going out to lunch and dinner
- Raise your deductibles (which will lower your monthly payments)
- Cancel your land line and minimize your cell phone expenses (cut off your data plan)
- Cut way back on entertainment expenses and enjoy making memories at home or by exploring all the free entertainment your city offers
- Be creative!
The principle is basic: work through your budget and evaluate every penny you spend. Look for ways to eliminate extra spending. You must be ruthless.
And if you do not have a budget, start now by accounting for all you spend and gauging how much you spend – then cut the fluff.
- Tap into retirement savings
This might seem a little frightening, but it’s possible to cash out $10,000 from your IRA before you reach 59 ½ without too much damage from Uncle Sam. Normally you will have to pay taxes on the amount you pull out, and pay a 10% penalty fee … but Uncle Sam will bend the rules in a few cases. Buying a home is one of those exemptions.
To qualify you have to be a first time homebuyer, and if you ware married your spouse can tap into the retirement savings, too, for a total of $20,000.
Another option is to borrow from your 401k. This is an option that most employers allow. You can take out as much as 50% of the vested amount, all the way up to $50,000. This is not unlike taking a loan from yourself, where you pay off the loan, and it goes back into the 401k.
- Pick up part time work
Whether delivering pizzas or moonlighting as a landscaper, you can sock away some extra money while you’re saving up for that house.
For instance, if you pick up an extra job at a retail store working two nights a week and the weekend, you could work 24 additional hours a week. On the low end you could make $240 dollars each week … which is close to a thousand dollars a month.
If you have a skill like rehabbing houses or landscaping, you can pick up projects during the weekends that could be worth a couple hundred to a couple thousand dollars a weekend.
Also, ask your boss if you can take on extra projects to make extra money (of course this only makes sense if you qualify for overtime). And if you think it’s long overdue (and you earned it) don’t forget to ask your boss for a raise.
- Borrow from parents
If your parents are in healthy financial shape, then they may be in a position to help you with your down payment. This could be a mutually beneficial arrangement. You can borrow money from them, and then pay them back in interest (or not).
Or you could ask for a gift. Some parents have set aside money for this very reason. They want to help their children buy their first home. In order for the gift to count, the money has to be in the bank before you buy the home.
Some parents will insist you pay back the money, but without interest. One thing you’ll want to avoid is any sort of scheme in which they share in your debt by taking equity out of their own home.
- Refinance your debt
Most working adults in America have debt of some sort, whether it be credit card debt, a car note, or a student loan.
Those payments can be hefty, but if you look for simple refinance or consolidation of the loan, you can shave off a few dollars a month or more by reducing your interest rate. There are lots of programs out there that will help you, even if you have less than perfect credit. But do your homework to avoid the scams.
- Check out government and employer programs
Both the federal and state governments provide a number of resources and programs – from a VA loan to a HUD-sponsored grant – to help Americans buy a home.
A VA loan is probably the best choice for buying a home for veterans of foreign wars, active military, reservists, and even surviving spouses. A VA loan won’t get you cash for a down payment … instead a VA loan doesn’t require a down payment. (The VA doesn’t lend the money, it only backs loans made by private lenders.)
Your state probably has a pool of money available for down payments. These are distributed through a host of local and state agencies – and they are claimed quickly, expire fast, and change often. To find programs near you, you’ll need to look through the HUD’s state listings or talk to an informed Realtor or lender.
The company you work for might have a program, too (this is true of corporations, universities, and local and state governments). Talk to your human resources department.
- Sell and collect on large assets
Selling off large assets can lead to a substantial down payment. Think boats, second (and/or third, or even collector’s) cars, time-shares, or rental condos. Sell any of these assets to collect on cash.
In addition you can call in any outstanding loans on money or property you’ve loaned out. Ask people to pay you back, even if it is just a few hundred dollars. All that can accumulate.
Finally, call in your stakes in an inheritance. Talk to your parents about your portion of the inheritance and ask them if you can tap into it to buy a home. a
- Cash in a life-insurance policy
Look at your universal life insurance policy (not a “term” policy). These policies grow in value as you pay into them. Depending on your age, you may have a substantial down payment by either borrowing against or cashing out the policy.
However, this should be an option you cash in only if you no longer need the insurance. For example, your children may be grown and out of the house and your spouse works full time, so the need for cash in case of your death is slim to none.
This won’t work for the young parent who is the sole breadwinner of the family. If something tragic happens to you, your family will need to depend on that policy for living expenses.
Keep in mind if you choose to borrow against your life insurance, then you can lose coverage if you fail to pay back the value. There are other risks involved that differ from state to state, so call your insurance agent to talk through the advantages and disadvantages. In addition, if you have further questions your agent can’t answer, call your state’s insurance commissioner’s office.
Hopefully this list will give you a great start to saving that all-important down payment. Remember, the more you save before you purchase a home, the less you’ll spend on that home. Which leaves you plenty of money for those unexpected home repairs. But that’s another topic.