We all dream of owning a house. But we also worry about not having enough cash to afford the down payment on a home we wish to buy. Banks or lenders will usually require potential buyers to have on hand 20% of property’s asking price as down payment.
The good news is, there are ways to save up for a down payment:
- Open a dedicated savings account
This is the simplest route, but determine a comfortable amount to save every month and calculate how long it would take to reach your goal.
For example, if the house you want costs $200,000, a 20% down payment would be equivalent to $40,000. If you save, say, $1,000 a month, it would take three years and four months for you to come up with the down payment. If that’s a bit too long for you, think about depositing bonuses and tax refunds in your dedicated account.
- Open a high-yield savings or money market account
Banks offer as much as 10 to 20 times more on interest than a regular savings account. However, the highest rates on such accounts are offered by online-only banks. If dealing with online banks is not a problem for you, this may be your best savings option.
- Ask the bank about a certificate of deposit, referred to as a CD
It is offered by banks and credit unions with premium interest, on the condition that the customer leave a lump-sum deposit that can’t be withdrawn for a predetermined period of time. There is less flexibility and liquidity, but the principal protection and interests are attractive enough compared to a typical savings account.
- Consider a brokerage investment account
It allows you to invest money in mutual funds and stocks with the potential to generate better returns than a high-yield savings account. The risk is that the stock market is unpredictable. But this is favorable if the timeline to buy a home is not written in stone, or you are open enough to wait out any changes in the market. Money invested in stocks achieves earnings in the long run.
- Money saved in retirement accounts may also be used for a down payment
Some retirement plans, such as 401(k) and 403(b), allow you to borrow money from the account to buy a house. Holders of an IRA account and a first-time homebuyer may also withdraw money to buy the house. However, failure to repay the loan from retirement accounts carries penalties such as paying income taxes on the loaned amount, among others.
In conclusion, the two best options to secure a down payment to buy a house are a regular bank savings account and a high-yield savings or money market account.
Investment accounts may offer the highest returns, but they also have the highest risk – the value of your down payment fund might go down just when the money is needed.
If you’re looking to buy a home in Wisconsin’s West Bend and the surrounding areas, work with the right West Bend, WI Realtors. Emmer Real Estate Group can walk you through the process. Call 262.629.4747 or email ContactUs(at)EmmerRealEstate(dotted)com. You can also leave us a message here.