Since most lenders of home loans require at least 20% of the purchase price down before they will consider financing you at a decent rate, it will serve you well to start saving as soon as you know a new home is in your future. Saving has always been a issue for Americans, especially since a lot of the population is living paycheck  to paycheck and just barely getting by on what they make each month. This leaves little room for even a small savings, let alone for a down payment on a home.

A Savings Plan
But, as with much of personal finance, where there is a will there is a way and a bit of planning is all it takes to get started on achieving one large part of the American dream. The first step in your savings plan is deciding how much to save. If you have prequalified for a home loan, you should have a good estimate of what the cost of the home you can afford will be. The 20% rule is generally what is required  by lenders for financing those individuals who have good but not excellent credit scores. Without the 20% down, most lenders will require you to purchase Private Mortgage Insurance (PMI) that protects the lender should you default on your home loan. PMI adds costs to your overall mortgage so it is financially wise to save enough for a down payment and skip the PMI altogether.

Down Payment Math
If you are looking at a home that costs $100,000, you would need to save $20,000 towards a down payment. While $20k may seem like an impossible goal to reach in a reasonable period of time, it will help you to save money in the long-term and have instant equity in your new home. Within your budget you can estimate how much money you can save each week. You may have to cut out luxuries such as cable, internet, or cell phone packages in order to save more money each month. The more cash you can save in the shortest period of time without negatively affecting your other financial obligations, the closer you will be to your dream of owning a home.

Cut Your Budget
If you are unwilling to do more drastic measures as such, it can be a very long savings period to reach your goal. However, there may be additional resource which you can tap into to get the money you need faster. For instance, some retirement accounts  and IRA’s allow you to borrow money from yourself to use for a home purchase. You can also check with the Veteran’s Administration if you are a qualified veteran or the state housing authority to check out programs that help first-time homeowners or those living on low-to-moderate income levels.

Stash Your Cash Wisely
To make savings even more effective, consider stashing your cash into a number of places that will prove profitable, depending on the savings time you have planned out. Instead of allowing your savings to sit and earn a small interest rate at your local bank, consider opening an online savings account that earns more interest or a money market account. By putting your money in an account that earns 5% interest instead of one earning less than 1%, you can make your savings work harder and more efficiently for you and at the same time decrease the time it takes to reach your ultimate savings goal.

Tags: cash, down payments, homeownership, mortgage, savings plans

This entry was posted on Sunday, August 30th, 2009 at 4:41 am and is filed under tips. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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