Press release
How to save for a down payment?
How to save for a down payment?The very first step towards buying a home is saving for it. Saving for this requires a lot of discipline and perseverance, for it involves putting aside money for your future. Additionally, you also need to know or need to have the knowledge of where to invest your money.
Should you use a bank, an online savings account, or the stock market? “How to save for a down payment?" is a thousand-dollar question and it depends on your chances of becoming a homeowner.
What is a down payment?
Banks and other lenders of home loans do not give you the entire value of the new home you want to buy. They give you a large percentage of the home’s price, yes, but the rest of the money is up to you to gather. But how can you do that?
By down payment. Down payment is a sum of money that you as a home buyer pays at the beginning of buying a property or home. Even if you are taking a home loan or housing loan, you need to put forward some down payment. This is a part of the property’s total value.
Lenders typically give up to 80% of the property’s value when you go for a home loan. But you still need to give 20% of the property’s value as a down payment.
How do Down Payments work?
Here’s a common example of a down payment that is essential when buying a home. You as the lender need to pay around 5% and 25% of the property’s total price.
This amount has to be paid upfront. Banks and other financial institutions give you the rest of the total price. There are cases when the home loan down payment is not refundable if the deal does not go through.
Home loan down payments is also called deposits.
How Much You'll Need to Save
When giving you a mortgage, lenders and banks need you to give them a down payment. This reduces their risk in financing you the remainder of the property’s cost. Lenders prefer those people most who can give a fifth of the property’s price, at the very least.
And remember, banks and other lenders generally won’t give you more than 80% of the property’s value. The rest is something you have to manage.
But how?
If you have an excellent credit rating, lenders may still be willing to give you loans with down payments of less than 20%. Sometimes, in the case of excellent credit ratings, some lenders may not need you to give any down payment at all.
However, you should know that despite this huge benefit, or in exchange for it, you still need to pay PMI or Private Mortgage Insurance at an additional monthly cost.
On the other hand, if you are regarded as a high-risk borrower due to factors like credit history, lenders may want you to give a higher percentage of the property’s value as a down payment.
You can still choose to give a down payment that is more than the standard 20% of a property’s value if you have money. This is beneficial because the more you give as a down payment, the smaller is your mortgage and the less stressful it is to repay.
What are the Best Places to Keep Your Down Payment?
The money which you’ll eventually need for a down payment, but one which you need to save and grow, for now, needs to be put somewhere.
This ‘somewhere’ should be a place from where your money can be accessed and recovered quickly and easily. It should also be a place where you can add your funds, for instance from your salary account. Ideally, you should be getting a return from such a deposit.
It needs to be stable enough so that the value of your money will be sufficient enough to cover the down payment. Finding the best place, therefore, is not easy, as it needs to strike a balance between reward, risk, timing and flexibility.
Here are some options below.
Savings Account
This is the simplest choice. If you are already an existing customer at a bank, you can open a savings account even faster. Then you can easily transfer funds to and from this account, both manually and automatically by recurring transfers after each payday.
The downside is that you’ll get only a small return on your funds. That is because regular savings accounts have very low-interest rates.
High-Yield Savings Account
Now you may be wondering if there is something that can give you high interest?
Luckily, there is. It is called a High-Yield Savings Account. This is ideal if you want high interest but do not want to give up the normal deposit insurance. The simplest way to get one is through your bank account.
These accounts give much more interest than regular savings accounts. Normally, they give 10x to 20x what regular savings accounts give. However, such high-interest rates are offered by online-only banks. If you can do without visiting bank branches physically, this may be the best choice for you as it can earn you a lot.
The downside is that if you do not have an online banking account already, you will have to wait a bit longer for fund transfers to come from your checking account. Additionally, even this interest is nothing much compared to your other options.
Brokerage Account
If you can deal with a higher risk, you can pick an investment account at a major brokerage. This allows you to invest your money in mutual funds and stocks. Doing so can earn you much higher returns than even a high-yield savings account cannot give.
The downside is that market volatility is a big concern at all times. You may never even get your funds on time when you need them. Equity brokerages are best for those who have sufficiently flexible time to buy a home, and who can weather out market fluctuations. Know that after the market downturns your funds in brokerage accounts will give greater earnings.
How to buy a home
If you are a beginner at buying a home, here are some tips to help you out.
Know if you are ready to buy
Depending on your area, the mortgage payment may be the same or even less than the local rental rates. A few things you should keep in mind are home insurance, additional taxes and funds, and home association fees. Typically, the total cost needs to be around 1% of the total purchase price.
Saving for a down payment
To give down payment, you need to have some money saved up. Know that some lenders require you to give 20% of the property’s price as a down payment. However, if you do put in the 20%, you can indeed save up money by not paying private mortgage insurance, which is an expense that some lenders want you to have if you do put the 20% down payment. In some places though, you may be able to put down only 10%, so choose your lender carefully.
Stay there at least 5 years
If you want to go for decent home equity, stay at the home for at least 5 years before selling it off. Before selling before that period, you may either lose money or you can break even when calculating interest payments and closing costs.
The Bottom Line
Down payment means a lot of money. We’re talking about lakhs here. Thus, you may want to research carefully where you want to put your money for growth. Pick the option that best reflects your priorities and needs for buying a home.
Plot No: 56, Empire Building, Anupama Homes, Emerald Gardens, Gachibowli, Nanakaramguda, Hyderabad, Telangana 500008
ch.sreekanth@mymoneykarma.com
Intelligent Finance
Faster, easier, and more secure way of managing your money.
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