Armchair Millionaire Community Bulletin: Clearing the Down Payment Hurdle

March 9, 2004

Saving a the money you need to make a house down payment is never easy, but you do have some excellent options that will make the going a bit smoother.

(PRWEB) March 9, 2004--Many people are anxious to get into their first homes, given that mortgage rates remain near all-time lows and that home prices are on the rise. According to the National Association of Realtors, the average home price in January of this year was $168,700--an increase of 5.3 percent over just a year ago.

Accumulating enough for the down payment on your first home can be one of the biggest financial hurdles you'll ever face. To get the benefit of their experience, we asked members of the Armchair Millionaire community about how they'd gotten their own down payments together. Here is just a little of what we heard:

"I cashed out most of my stock options with my employer, as did my husband. Good thing too, since they lost over 90 percent of their value in the ensuing recession! Meanwhile, our house appreciated over $50,000 in 1.5 years." --Michelle

"When I was a full-time college student, I worked 30+ hours a week. In the summer, I worked two full-time jobs. And I saved! Many students had a beer fund, but I had a house fund." --Erin

"My husband and I took a lease with option to buy for two years before we purchased our house." --Martha

While the traditional down payment was 20 percent of the purchase price, requirements have relaxed in recent years and most buyers actually put down less these days. However, you'll still need to come up with a sizeable chunk of money. My guide offers you some options.

The Armchair Millionaire's Guide for Getting a Down Payment

Borrow from family. A loan from the Bank of Mom and Dad is a common route for many first-time homebuyers. The upside: Can be quick and easy, with a favorable interest rate for repayment. The downside: Whenever you don't have your own down payment money on the line, lenders will see your loan as riskier than if you'd put your own money down. This means you may pay a higher mortgage interest rate.

Get an 80-20 mortgage. This is actually two loans--one for 80 percent of the home's purchase price and the other for 20 percent. The upside: You can avoid paying for mortgage insurance, which is usually required if you make a down payment of less than 20 percent. The downside: Because you borrow 100 percent of the home's purchase price, you may end up owing more than the home is worth if its value drops.

Withdraw from an IRA. You can withdraw money for either a Roth or a traditional IRA. The upside: As long as you use the money for qualifying first-time homebuyer costs, you'll avoid the 10 percent penalty that you'd otherwise have to pay for withdrawals made before age 59 1/2. The downside: You'll lose the huge benefit of the tax-advantaged growth of that money, which you'll never be able to make up again. (The rules governing IRA withdrawals are complex, so consult with a tax professional before going this route.)

Save it the old-fashioned way. Have a set amount automatically withdrawn from your bank account each month and deposited into a separate account devoted to just your down payment savings. The upside: You'll be indebted to no one for your down payment, and will bypass mortgage insurance. The downside: You'll need to wait to buy until you have enough saved. In the meantime, both interest rates and home prices could go up.

THE BOTTOM LINE: Saving a bundle of money is never easy, and there's a cost associated with every option. Choose wisely, and soon you'll be on track to making the one of the most important purchases of your life.

This column appears each week on CNNMoney.com, the Web sites for CNN and Money Magazine. Syndicate this weekly column in your publication or Web site: http://www.armchairmillionaire.com/weeklycolumn


ArmchairMillionaire.com was founded in 1997. The company's first book, The Armchair Millionaire, was published in 2001. Today, www.ArmchairMillionaire.com is an established community of common sense savers and investors.