By Kelly K. Spors
From RealEstateJournal.=
com
It's a=20
dream of many young adults to buy a first home. But there's =
an=20
unfortunate reality: Even buying a "starter home" with =
today's lofty=20
prices can mean saving tens of thousands of dollars for a =
down=20
payment.=20
How do you pull it off? The key, obviously, is to save =
like=20
crazy. Beyond that, here are several suggestions that may =
make the=20
path to home ownership a bit easier.
1. Aim for 20 percent down.
Timothy Wyman of =
the Center=20
for Financial Planning in Southfield, Mich., says you may be =
able to=20
get by with putting only 10 percent of the purchase price =
down, as=20
long as you are confident your income will remain steady or =
grow and=20
you plan on keeping the home at least five years.
But Mr. Wyman says buyers should ideally aim to save up =
20=20
percent or more of the price. The risk of putting down too =
little:=20
If the home falls in value and you sell at a loss, you'll =
owe more=20
to the lender than you receive from the buyer.
In addition, many mortgages require buyers who put down =
less than=20
20 percent to get private mortgage insurance, which can add =
$80 to=20
$100 to your monthly bill. And the less you put down, the =
higher=20
your loan balance and therefore your monthly payment will =
be.
Mortgage lender Washington Mutual estimates that a buyer =
who puts=20
down 5 percent on a $300,000 home with a 5.88 percent =
30-year=20
fixed-rate mortgage might pay $2,133 a month, including fees =
and=20
property tax, while a buyer who puts 20 percent down would =
likely=20
pay $1,682 a month. (The estimate assumes the 5 percent-down =
buyer=20
must pay for mortgage insurance.)
You'll also need extra money set aside on top of the down =
payment=20
for closing costs such as title insurance and mortgage fees, =
which=20
can reach up to $5,000. If you want to pay "points" to lower =
your=20
mortgage rate -- a smart idea for borrowers who expect to =
stay in a=20
home several years -- you'll want a few thousand dollars =
more.
To find out the price of local starter homes, so you can =
estimate=20
what you'll need to save up, you can check out home listings =
on Realtor.com or get=20
sales data at HomeInsight.
2. Keep it separate.
Set up a separate account =
for your=20
down-payment funds, so the money doesn't get intermingled =
with other=20
savings and so you can keep track of how much you save. This =
would=20
probably be a taxable account at a bank or brokerage =
firm.
Mr. Wyman suggests setting up regular automatic deposits =
from a=20
checking account into the down-payment account to force =
regular=20
savings. "You want to be moving money to this account before =
you=20
spend it," he says.
3. Consider your time horizon.
How best to =
invest=20
down-payment money depends on your time horizon for =
purchasing a=20
home. Those planning to buy in three years or less should =
put the=20
money in conservative investments such as short-term =
certificates of=20
deposit or short-term bond mutual funds to shield themselves =
from=20
potential market downturns.
If you're waiting at least five years to buy, you can =
invest more=20
aggressively. A balanced mutual fund that invests in, say, =
60=20
percent stocks and 40 percent bonds, such as Vanguard =
Balanced Index=20
Fund, is a good choice and should perform better over the =
longer=20
period.
4. Get extra help.
Few first-time buyers pony =
up the=20
entire down payment on their own. Nearly 23 percent of first =
down=20
payments come as gifts from relatives and friends, according =
to a=20
recent survey by the National Association of Realtors.
While such assistance is great, there are also other =
places you=20
can look. There are many down-payment assistance programs =
for=20
first-time buyers that are offered by banks, local =
governments and=20
charities. Many are open only to low- or moderate-income =
buyers and=20
some are targeted to specific communities.
Some programs lend buyers a substantial portion of the =
down=20
payment. For example, the California Housing Finance Agency =
can=20
provide eligible first-time home buyers in Los Angeles 3 =
percent of=20
a home's purchase price as down-payment or closing-cost =
assistance.=20
The money must be repaid when the buyer sells the home, =
refinances=20
or pays off the loan.
Many lenders have information about assistance programs =
that=20
borrowers can seek help from.
5. Clean up your finances.
Your credit history =
will=20
determine the loan terms and mortgage rates you qualify for. =
You=20
could be offered a smaller loan or charged a higher rate if =
a lender=20
is concerned you might not be able to repay.
So before approaching lenders, first-time buyers should =
give=20
themselves the financial equivalent of a physical exam, says =
Ellie=20
Deskin, a financial planner in Troy, Mich. This means =
checking your=20
credit score and credit reports with the three major credit =
bureaus=20
and fixing any errors. (Consumers can now get one free copy =
of each=20
report annually by going to Web site annualcreditreport.com.)
Also consider paying down some debt, especially =
high-interest=20
debt such as credit cards, that might flag you as a riskier=20
borrower.
While some debt is okay, being overloaded will likely =
tarnish=20
your loan terms.
6. Weigh mortgage tradeoffs.
Lenders =
increasingly offer=20
creative loans, such as interest-only loans and certain =
types of=20
adjustable-rate loans, that can reduce your monthly payments =
-- at=20
least for a while. But these alternative loans can be much =
riskier=20
than fixed-rate loans, because monthly payments can jump =
after a few=20
years.
A general rule of thumb is that your monthly mortgage =
payment=20
shouldn't exceed 28 percent of your household's gross =
monthly=20
income. Check out some mortgage calculators at Dinkytown.net =
to=20
calculate what your monthly payment would be with different =
types of=20
loans.
7. Hands off retirement savings.
If you're just =
shy of=20
saving up enough for a home, you might consider taking a =
small loan=20
from your 401(k) plan or withdrawing some principal from a =
Roth IRA.=20
But many financial advisers caution against tapping =
retirement=20
accounts too heavily for a home purchase.
For one thing, you're going to need your retirement =
stash, so you=20
don't want to gouge it. Taking a loan from your 401(k) can =
also be=20
risky, since you may have to pay it back if you leave the =
company.=20
And if you take money out of your Roth, you can't replace =
it, so you=20
lose some of the Roth's long-term benefit of tax-free =
earnings.
This article is reprinted =
by permission=20
from RealEstateJournal.=
com
Copyright=20
=A9 Dow Jones & Co., Inc. All rights =
reserved.
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