- Michael T. Berger, MBA
Saving Tips For Your Next Home
Before 2007, banks would normally hand out 100% loans to homeowners. Sure, many people became homeowners but they were driven from their homes by the recession that occurred. When the recession hit, home prices fell, mortgage resources dried up and thousands of people owed more to the bank than their house was worth. No option to short sell then. So there was massive foreclosure.
Banks have learnt their lesson. These days, most banks will insist that you have a deposit worth at least 10% of the value of the property you want to buy. So, if you’re buying a $200,000 house, you have to put down at least $20,000.
Now, the case is that the higher you can pay, the better the deal you get. If you pay 40,000 on a 200,000 home, the bank thanks you for a good job by giving you a more favorable rate than if you paid 20,000. “The size of your deposit is key to saving tens o f thousands of dollars over the life of your mortgage. The golden rule with mortgages is to save as large a deposit as possible . The larger your deposit, the cheaper your mortgage rate will be.”
Paying a better percentage means you can pay even if the rates go up. It's not just about paying back capital with the interest. Banks are now interested in your ability to pay back the loan even at higher interest rates. Show the bank that there is no cause for alarm and they give you their best package. Theminimum is 5% but the bigger your deposit, the better the rates you get.
· 5% is the minimum investment
· 25% gets you a decent rate
· 40% gets you the best rates
Hence, if you plan to buy a house, the more money you can save, the better. But it’s not easy to save. You can easily be tempted to go back and withdraw your money whenever things go a little rough. How do you avoid this and automate your saving? How do you put yourself a big step closer towards your dream of home ownership?
1. Determine How Much You Need
Start with the end in mind. What kind of house do you want to buy and what’s the cost of that kind of house? As a rule, your housing income should not exceed 28 percent of your stable monthly income. If your monthly income is 5,000, you can allocate 1,400 of that to your future house payment.
2. Save Safe
Don’t gamble with your home ownership dream. "Instead of investing your down payment savings in risk-type investments like stocks, real estate trusts etc., save your money in super-safe vehicles like your old savings account or a certificate of deposit." You need to set a definite time frame to achieve this goal, and put money in the account consistently.
3. Make It Automated
Setup a system of saving much the same as your 401k. That means you should setup some kind of payroll investment plan. A fixed percentage of your regular pay should go into a savings account or money market account dedicated to the funds for your downpayment.
4. Bank Periodic Windfalls
You can shorten the length of time needed to save for a down payment by banking periodic windfalls. Periodic windfalls could be income tax refunds, gifts received, bonuses or large commission checks. It can also include sale of personal assets.
Automating your savings and working with a plan will make saving money on down payment for your home easier. It’s not a merry-go-round. But the determination pays off in the end.
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