Saving for a Down Payment FAQ

Dated: November 6 2020

Views: 194

Saving for a down payment is one of the first steps to buying a home --apart from getting pre-qualified for a mortgage. Starting your savings also requires quite a bit of commitment. It takes discipline to forgo that weekend getaway with friends or reduce everyday purchases like your usual morning latte. But when you're saving for a house, every purchase and dollar saved must be a deliberate choice.

But where's the best place to store your home-savings nest egg? After all, you'll be saving in the tens of thousands, not just a couple of thousand. Lenders will also need to verify where your downpayment came from, meaning they'll want to see a record of deposits that prove your savings efforts or gifted funds.

Here are some suggestions for where to store your down payment:

How Much Do You Need To Save For A House?

There isn't a specific amount, per se, but there is a general percentage that you should be aiming for. For conventional loans and to avoid paying private mortgage insurance (PMI), you'll want to save at least 20% of the asking price. So for a $250k home, you want about $50k for the downpayment. Add a little more for closing costs and moving in necessities (like truck rental, home repairs, or appliances), and you'll have a comfortable cushion for all your new home needs.

It may seem like an extraordinary amount, but putting 20% down (if you are able) can save you thousands of dollars over the life of the mortgage loan.

But 20% down isn't the only option! You can put down less (and pay for PMI) or apply for a government-backed loan.

With FHA, USDA, and VA loan options, prospective homeowners can buy a home with a down payment with much less. So for that same $250k house, you could put down under $9k with an FHA or $0 with USDA and VA loans (must meet specific criteria, please contact us for more info).

Where to Keep Your Down Payment

The first thing to consider when looking into the various savings accounts is that it must be easily accessible, both to withdraw and to deposit. And ideally, you'll want an account that earns at a reasonable rate while remaining stable in value as well. Here are some account types to consider for your home down payment savings.

Savings Account

The most obvious place to save your down payment is where you bank. If you don't already have a savings account, opening one should be relatively easy, and transferring funds is just as simple. While a basic savings account is a secure place, thanks to FDIC insurance or NCUA for credit unions, the interest rates for earning are meager.

Still, it's a very good and quick option for starting your nest egg.

High-Yield Savings Account

Another option for storing your down payment is a high-yield savings account. This attractive option can earn as much as 10 times more than standard savings accounts while offering the FDIC or NCUA safety net. Something to keep in mind with especially high-yielding accounts is that you'll likely be charged income tax on the interest earned. This isn't necessarily a bad thing --just something to note. However, the honor of the highest yielding savings accounts goes to other investment options.

Investment Account

The highest-earning, as well as the riskiest type of account that you can store your down payment, is an investment account. This type of account invests your funds in stocks and mutual funds and have the potential of earning significantly. It's no secret that the stock market is volatile, and adequate returns are usually realized over longer terms.

Considering this, investing a house down payment in the stocks and mutual funds is best for those who are flexible and can "ride out" any downturns in the market.

Where Should You Put Your Nest Egg?

For the sake of convenience and safety, a standard savings account would suffice. If you can handle the risk for the potential of a generous payout, investing is worth looking into. Whichever you choose, make sure it aligns with your long and short-term goals for buying a home.

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