How to determine what you need - and build it.
One of the main things you can do to prepare for homeownership is saving up for a down payment. There are several easy steps you can take to get started, or if you've already been saving, to grow your down payment even more.
Sit down with a lender.
Getting a professional opinion on your financial ability to qualify for a home loan can help you figure out where you stand and set goals for the future. You may consider sitting down with a real estate professional as well, to get an idea of what home prices are like your area, which will influence your down payment, and what opportunities you can pursue when you're ready.
Determine your down payment goal.
So how much will you need? That depends on the purchase price of your home and your loan program. The down payment is a percentage of the purchase price, and different loan programs require different percentages, ranging from 3.5% to 20%. The more you can contribute, the more attractive you'll be to lenders. With a higher down payment, you’ll borrow less, and therefore pay less interest over the life of a loan. If you can put down 20%, you won’t have to add private mortgage insurance (PMI) to your payments.
Home Loans Tip #9
An advertised rate isn't always the same as your loan's annual percentage rate (APR). The APR is the true total cost of your loan stated as a yearly rate and includes additional fees you would pay, so make sure you compare one loan's APR against another loan's APR when you're shopping for a loan.
Set up a savings account.
When you start saving for your down payment, it’s a good idea to keep your down payment fund separate from the rest of your money, naming your account "Home" or "Down Payment" to make it clear that the money is specially earmarked. Also keep in mind that you will likely need more cash than just the down payment; it’s important to have funds available for other loan costs, as well as moving costs, home maintenance, new furniture, or appliances.
Save even more.
If you're feeling motivated and really want to speed up your savings efforts, take a look at some other ways to save:
- Trim your budget. If you take a look at your monthly expenses, you can probably uncover ways to cut back that won't too drastically affect your lifestyle. Maybe it's eating out less, or perhaps you could consolidate your phone and Internet service. These small savings can really add up.
- Decrease your rent. This option isn't for everyone, but if you're paying high rent and aren't planning on buying right away, consider moving to a less expensive place or finding a roommate to share your expenses. Downsizing now could help you afford what you want later.
- Increase your income. Are you able to work more hours or take on a second job? Increasing your income can help put you on the savings fast track.
- Get help from your family. If a parent or other individual is willing to help you out, they can give up to $13,000 a year1 without having to pay gift taxes. And that's $13,000 per person: they can give this gift to you, your spouse, and each of your children. You will need to have a signed "gift letter" that says you do not have to repay it. Make sure your gift-giver talks to a tax professional before they write any checks, so they can be fully informed on the details.
Watching your money add up can help you stay motivated and reach your savings goal. With careful planning and good money management habits, you’ll be much closer to homeownership. And in the end, the reward will be yours.
If you want additional saving strategies that can help you become a more informed home loan customer, visit the Bank of America home loan guide and learning center.
What's next? Understanding your home loan options
1This amount applies to the 2009 tax year and may or may not be extended beyond December 31, 2009.