STARTING OUT: by Kelly K. Spors
(Reprinted from The Wall Street Journal, Sunday, 2/26/06)
How to Save for Your
It's a dream of
many young adults to buy a first home. But there's an unfortunate
reality: Even buying a "starter home: with today's lofty prices can
mean saving tens of thousands of dollars for a down payment.
How do you pull it off? The key, obviously, is to
save like crazy. Beyond that, here are several suggestions that may
make the path to home ownership a bit easier.
AIM FOR 20%
DOWN. Timothy Wyman of the Center for Financial Planning in
Southfield, Mich., says you may be able to get by with putting only 10%
of the purchase price down, as long as you are confident your income
will remain steady or grow and you plan on keeping the home at least
But Mr. Wyman says buyers should ideally aim to save up
to 20% or more of the price. The risk of putting down too little:
If the home falls in value and you sell at a loss, you'll owe more to
the lender than you receive from the buyer.
In addition, many mortgages require buyers who put down
less than 20% to get private mortgage insurance, which can add $80 to
$100 to your monthly bill. And the less you put down, the higher
your loan balance and therefore your monthly payment will be.
Mortgage lender Washington Mutual estimates that a
buyer who puts down 5% on a $300,000 home with a 5.88% 30-year
fixed-rate mortgage might pay $2,133 a month, including fees and
property tax, while a buyer who puts 20% down would likely pay $1,682 a
month. (The estimate assumes the 5%-down buyer must pay for mortgage
You will also need extra money set aside on top of the
down payment for closing costs such as title insurance and mortgage
fees, which can reach up to $5,000 or more. If you want to pay
"points" to lower your mortgage rate -- a smart idea for borrowers who
expect to stay in a home several years -- you'll want a few thousand
To find out the price of local starter homes, so you
can estimate what you'll need to save up, you can check out home
listings on this website by
SEPARATE. Set up a separate account for your
down-payment funds, so the money doesn't get intermingled with other
savings and so you can keep track of how much you save. This would
probably be a taxable account at a bank or brokerage firm.
Mr. Wyman suggests setting up regular automatic
deposits from a checking account into the down-payment account to force
regular savings. "You want to be moving money to this account
before you spend it," he says.
TIME HORIZON. How best to invest down-payment money
depends on your time horizon for purchasing a home. Those planning
to buy in three years or less should put the money in conservative
investments such as short-term certificates of deposit or short-term
bond mutual funds to shield themselves from potential market downturns.
If you're waiting at least five years to buy, you can
invest more aggressively. A balanced mutual fund that invests in,
say, 60% stocks and 40% bonds, such as Vanguard Balanced Index Fund, is
a good choice and should perform better over the longer period.
HELP. Few first-time buyers pony up the entire down
payment on their own. Nearly 23% of first down payments come as
gifts from relatives and friends, according to a recent survey by the
National Association of Realtors.
While such assistance is great, there are also other
places you can look. There are many down-payment assistance
programs for first-time buyers that are offered by banks, local
governments and charities. Many are open only to low -income or
moderate-income buyers and some are targeted to specific communities.
Some programs lend buyers a substantial portion of the
down payment. For example, the California Housing Finance Agency
can provide eligible first-time home-buyers in Los Angeles 3% of a
home's purchase price as down-payment or closing-cost assistance.
The money must be repaid when the buyer sells the home, refinances or
pays off the loan.
Many lenders have information about assistance programs
that borrowers can seek help from.
CLEAN UP YOU
FINANCES. Your credit history will determine the
loan terms and mortgage rates you qualify for. you could be
offered a smaller loan or charged a higher rate if a lender is concerned
you might not be able to repay.
So before approaching lenders, first-time buyers should
give themselves the financial equivalent of a physical exam, says Ellie
Deskin, a financial planner in Troy, Mich. This means checking
your credit score and credit reports with the three major credit bureaus
and fixing any errors. (Consumers can now get one free copy of
each report annually by going to to the website:
Also consider paying down some debt, especially
high-interest debt such as credit cards, that might flag you as a
riskier borrower. While some debt is okay, being overloaded will
likely tarnish your loan terms.
MORTGAGE TRADE-OFFS. Lenders increasingly offer
creative loans, such as interest-only loans and certain types of
adjustable-rate loans, that can reduce your monthly payments -- at least
for a while. But these alternative loans can be much riskier than
fixed-rate loans, because monthly payments can jump after a few years.
A general rule of thumb is that your monthly mortgage
payment shouldn't exceed 28% of your household's gross monthly income.
Check out some
mortgage calculators to calculate what ;your monthly payment would
be with different types of loans.
RETIREMENT SAVINGS. If you're just shy of saving up
enough for a home, you might consider taking a small loan from your
401(k) plan or withdrawing some principal from a Roth IRA. But
many financial advisers caution against tapping retirement accounts too
heavily for a home purchase.
For one thing, you're going to need your retirement
stash, so you don't want to gouge it. Taking a loan from your
401(k) can also be risky, since you may have to pay it back if you leave
the company. And if you take money out of your Roth, you can't
replace it, so lose some of the Roth's long-term benefit of tax-free
NOTE: This article if furnished for
informational purposes only and has not been verified or endorsed by
www.firsttimehomebuyerlv.com, Bill Smith-Realtor® or
his real estate Broker's office.