| Saving for a down payment on a home can be one of the
most challenging tasks a young family faces in the quest for home ownership. Creating
a down payment savings plan and sticking to it will help potential buyers reach
their goal of home ownership faster.
The purchase of a home entails saving
for three up-front costs. The down payment is the largest part and is a percentage
of the total purchase price of the house. As the economy has improved and home
prices have stabilized in recent years, down payment requirements in New England
have dropped considerably. Today, first time home buyers can purchase a home with
a down payment ranging from three to five percent of the purchase price.
In addition to a down payment, funds are needed to cover closing costs. Closing
costs include all fees required to execute the sales transaction, such as attorney
fees, title insurance, appraisals, points and tax escrows. While these charges
vary considerably, most home buyers will need at least $3,000 to $5,000 for closing
costs.
Finally, home buyers need to show that after paying the down payment
and closing costs they will still have some reserve funds to protect against short-term
cash flow problems. Ideally, a home buyer will have at least three months' worth
of housing payments available after closing. These funds do not need to be paid
out; they simply remain in the home buyer's savings.
As an example of
total cash required, a home buyer purchasing a $200,000 home with a $1,750 monthly
housing payment would need to have approximately $20,000 available. This includes
$10,000 for a five percent down payment, approximately $5,000 for closing costs
and about $5,000 in payment reserves. After closing, the home buyer would have
$5,000 left over.
For many first time home buyer programs, 2% of the down
payment can be financed along with a portion of the closing costs, and reserve
payment requirements can be reduced. These programs can decrease cash requirements
from over $20,000 down to less than $12,000 in the same example.
Based
on the requirements outlined above, future home buyers can develop a savings plan
that will help them achieve their goal of home ownership in the near future. Since
the down payment required depends on the purchase price, a home buyer should meet
with a mortgage lending professional to determine how large a mortgage can be
obtained. The maximum loan amount will determine the approximate price range in
which a home buyer should be looking. For example, a home buyer whose income will
support a mortgage of $190,000 can look for homes with a price of about $200,000
and plan to save a down payment of about $10,000.
Before starting a savings
plan, a future home buyer needs to determine his or her current financial position.
This includes reviewing all assets and liabilities, developing a budget and planning
how much to save each month. When analyzing total current assets, a consumer should
not overlook any source of funds. In addition to all checking and savings accounts,
many people have CDs, stocks, mutual funds and savings bonds. Retirement funds
such as a 401k or an IRA can be counted toward the payment reserve requirement.
Some 401k plans even allow employees to borrow against the plan. Proceeds from
borrowing against one's own retirement funds can be used toward a down payment.
By subtracting all current financial assets from the amount of funds needed to
purchase a home, one can determine how much needs to be saved. A cash flow budget
should then be prepared to determine how much can realistically be saved monthly.
Some sacrifices of non-essential items may need to be delayed temporarily in order
to meet each monthly goal! No matter how a home buyer accumulates funds to purchase
a home, careful planning will always smooth the road to home ownership.
Article continued at http://www.mortgagealmanac.com/articles/96-savingfordownpayment.htmll
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