How To Invest Mortgage Downpayment Till The Time You Are Ready To Buy

How to invest the downpayment while you are accumulating it, till the time that you are ready to purchase the home.

As with many others investing decisions, how to invest the money that you are saving for the down payment on your home loan depends on how soon you expect to need the money. Not only is it about tying down the money for a long or short period of time, but also about the riskiness of more volatile growth oriented investment as opposed to choosing less volatile investment.

Typically, the longer you can afford to keep your down payment invested, the more growth oriented and risky investments you may consider such as stocks. For a shorter time frame, typically five years or less, choosing a less volatile investment is advisable.

This is simply because a volatile investment may see lots of ups and down and may only yield good return over a long period of time. By investing in less risky and conventional forms of investment such as market funds and certificate of deposits, you will earn more regular return and your principal is safeguarded. This is ideal when you know that you are going to need the money for the down payment in a short amount of time, typically within five years.

where to invest mortage downpayment amount

Investing the down payment money in stocks is a dangerous strategy. There may be a time when the market is on the rise and the yielding 20% to 100% result in a year. However, since this is a volatile market, it can just as easily crash and reduce the value of investment to even lesser than what you initially invested. This may leave you with no option but to wait for a longer period of time to purchase a home. Your expected home purchase may get delayed for years. Stocks are inappropriate investment for down payment money that you expect to require within the next five years.

The need to invest the money that you’re saving for a down payment comes from the fact that most people usually take a few years in order to come up with a requirement amount. During this time, it makes sense to put money somewhere where it can work for itself and grow. This itself will help reduce the burden on you to save the required amount for making the home purchase.

Downpayment Investment for five years or less

Unless you expect to buy a home in the next 7 to 10 years, you should not consider investing in growth oriented investments such as stocks. If you are like most prospective home owners, you are not in a position to take many risks with the money that you’re saving for the down payment. Sometimes, possibility of unexpectedly high returns and yields on certain stocks makes people greedy and think that they can double their down payment portfolio in just a couple of years. However, this is a highly risky proposition.

Although it may appear staid and boring, the best place for investing your down payment is probably in a money market mutual fund. Just like bank savings accounts, money market mutual funds do not risk your principal amount invested. This amounts remains the same and you earn interest on the money that you have invested. Money market funds invest in safe investments such as treasury bills, bank certificate of deposits and commercial paper which all short-term IOUs used issued by most creditors for corporations and companies.

Money market funds are one of the three types of mutual funds the other two being those that focus on bonds and those that focus on stocks or equity funds. Many people consider mutual funds to be as risky as investing in stocks. But it is true that the value of your fund does depend on market conditions but under the securities and exchange commission regulations, money market funds can invest only in safe security is and money funds investments must be made to have an average maturity of less than 90 days. This short-term nature of these funds eliminates the risk of money market funds being sensitive to the changes in interest rate in the same way that bond funds and stock funds are.

You may get a reasonable interest rate from a bank savings account. However, it will nearly always be less than the interest rate that you can get on the best money market fund.

If you do want to earn interest by keeping your money in a bank, look around. Smaller savings and loans and credit unions may offer you more competitive rates than the larger banks.

This could be simply because lower overheads mean more money to give to the investors.

Some of the best money market funds also offer a checkwriting facility. This comes in extremely handy when you need to access your money. The withdrawals also come in tax-free formats. If you are in a higher income tax bracket a tax-free money market fund may allow you to earn a higher effective yields than a money fund that pays taxable interest. But you should note that you pay tax only on money invested outside tax sheltered retirement accounts. When you’re in a high tax bracket but you are in a position to save by investing in a tax-free money market fund. This holds true if you happen to reside in a state with high income taxes. You can consider state money market fund which pays interest that’s free of both federal and state tax.

The best money market funds also offer several facilities like telephone exchange and redemption and automated, electronic exchange services with your bank account.

Automatic investment comes in handy for generating your down payment for home purchase. You can have a set amount of money automatically withdrawn from your bank account and into your money market fund every month.

When choosing a particular type of money market funds and such as general, treasury for tax relief, you’ll find different banks and competitors offering the same kind of bond but basically investing in the same security.

You can however choose and make a better decision by opting for the institution that has a lower overhead.

A money fund’s operating expenses which are deducted before payment of dividends are the major factor in determining a money funds return on investment. As with the high overhead of bank branches, the higher a money fund operating expenses, lower its returns. You can find excellent money funds from the best mutual fund companies for annual operating expenses of .5% or less. Listed below are some of the recommendations.

When you are not in a higher federal tax bracket and you are not in a high state tax bracket which means that you pay less than 5% in state taxes, consider tax money market funds for investing the downpayment money.

(Disclaimer: The suggestions  for investment funds listed above and through out this page are merely suggestions. They are not intended to be a professional or personal recommendations. The viability of these suggestions can change any time in the real market scenario. Always, consult a professional such as your accountant or banker before considering making an investment. Please read the Privacy Policy and Disclaimer.)

Municipal money market funds, also known as munis, invest in short-term debt issued by state and local governments. The municipal money market fund which pays you federally tax-free dividends, are issued by state and local governments throughout the country. A state’s district municipal fund invests in state and local government issued munis for one state, such as New York. If you live in New York and buy a New York municipal fund, the dividends on that fund are generally free of both federal and New York State tax. Sometimes your state may not have a good state tax-free money market fund available. If this is your situation, you are likely to be best off with one of the national money market funds.

State tax-free money market funds are a good option when you are in a higher federal tax bracket and the high state tax bracket which means that you pay 5% or higher. You can get in touch with the following mutual fund companies in order to see if they offer a fund for your state.

How to get in touch with mutual fund companies

It is quite possible that a mutual fund company does not have an office in your state or any local branch in your city. Generally this is done to help the mission fund company to keep the overheads low so they can pay greater dividends to the investors.

However, this does not mean that it is difficult to deal with an investment company which does not have a location near you. They have an efficient consume a cell which is open to service through toll-free phone numbers, e-mail and the Internet. Some fun provisos have branch offices in major cities as well. Here’s how you can reach the major mutual fund companies that we have earlier spoken about in this section:

Fidelity: 800-544-8888; www.fidelity.com.

T. Rowe Price: 800-638-5660; www.T. Rowe Price.com

USAA: 800 — 382 — 8722; www.USAA.com

Vanguard: 800-662-7447; www.van-guard.com.

Short-term bonds and bond funds

You may get the feeling that 3 to 5 years is a bit too long for your money to be put away in a money market fund. You might prefer to invest in bonds and bond funds instead. However, you should do well to understand that the returns on bond funds are heavily dependent on the market trend. There have been certain years in which bonds maturing in five years have got very little in the way of extra return as compared to a good market fund. During other periods, 3 to 5 year bond yielded a good deal more interest than a money market fund.

Whenever you invest in a bond that is not going to mature any time soon, you are taking on a risk that the interest rate may increase and unexpected inflation may cause the bond to pay less interest than the rate of inflation.

Most of the time bonds that mature in a few short years should produce a slightly higher rate of return for you than an average money market or savings account. However, you should still recognize the fact that you may end up owning the same or perhaps even less than you would have had you stuck with a money market fund. Rising interest rates can deflate the value of investment in bonds. Invests in bonds only if you expect to hold them for at least 3 to 5 years.

If you want to invest in individual bonds and you are not in a high tax bracket, you may consider treasury bonds which do not require monitoring of credit risk. Also look at the yield on bank certificates of deposit.

You may consider some high quality short-term bond mutual funds to invest in such as the Vanguard short-term investment grade portfolio. If you’re in a high tax bracket, a tax-free money market fund is extremely competitive and hard to beat when it comes to net returns. Some federal tax-free bond funds to consider include Vanguard short-term tax-exempt and vanguards limited term tax exempt funds. Double tax-free short-term bonds just don’t exist.

Investing the down payment for more than five years

If you expect to be saving and holding on to your down payment for more than five years, you can consider other risky investments such as bonds, stocks but keep in mind that you should try and take a conservative approach even in this scenario.

Do not get too greedy and take overt risks because at the end of the day, you do not want to lose the principal money and do not want your effort to save all the money for your dream home to have been in vain. When it comes to saving down payment for your dream home, the old adage does ring true, it’s better to be safe than sorry.

How to Buy A Home With Less Downpayment

It can be difficult in most circumstances to save money for 20% down payment in order to buy a home. By now you know that in order to avoid private mortgage insurance and to get good loan terms on your mortgage loan, you need to make at least 20% down payment of the purchase price of the house. However, if you find that saving all that much money is difficult, there are ways to get around the situation. These are some of the ways in which you can come up with more money to make the down payment or buy a house with a smaller down payment.

Increase your savings

It is easily given to understand that the more you save, the quicker you will be able to come up with the amount you need to make as a down payment on your home loan. For example, if you only save hundred dollars per month, it may take you much longer to save enough to make that down payment as opposed to when you save $300 per month. You can cut down on the number of years you have to wait to purchase a home by increasing your savings every month.

Most of us may or may not realize it but our spendings and budgeting does leave room for some adjustment. While spending carefully and saving as much as possible is a prudent financial habit for nearly everybody, it is all the more important for somebody who is planning to buy a home soon. Unless you are expecting a windfall or a contribution from your parents or other benevolent relatives, saving your own money may be the only method in which you can afford a home loan. You can start by looking at your budget and seeing where you can cut down your spending. We have dealt with the budgeting aspect in our earlier section in personal finance.

Buy a cheaper home

Another option if you cannot afford to make a large down payment is to choose a home that is cheaper. 20% off a smaller home loan is a lesser amount of money than 20% of a home that costs more. If you intend to purchase a home worth $200,000, by scaling back to 150 or $100,000, you can cut down on the amount of money that you require in order to meet a 20% down payment requirement.

Look for a low down payment mortgage loan lender

There are certain lenders and certain kind of loan programs that require lesser amount of down payment. Some mortgage lenders might only require as little as 5 to 10% of the purchase price. In order to qualify for such a mortgage you usually need to have an excellent credit rating.

However, even in this case you will not be able to avoid purchasing the Pvt. mortgage insurance which adds extra expense to your mortgage payment every year. Also, these lenders that do not require 20% up front, offer a more expensive loan in the sense that your interest rate may be higher.

The one good option to look at is the FHA home loans. FHA home loan lenders are much less stringent about the down payment requirement as well as the credit worthiness of the borrower. Check with local lenders and real estate agents in your area to find lenders who match your requirements.

It is usually a good idea to take a little more time and be able to generate a large down payment. This is usually beneficial in the long run because you get a good interest rate on your home loan as opposed to when making a less down payment. If you feel that you will have trouble saving a 20% down payment or you will take a long time, buying with less money down may be your best option.

How to buy a home for less downpayment

Access retirement accounts

Some employers and companies allow you to delve into your retirement savings in order to make a down payment on a mortgage. Just be sure to understand what the repayment terms are. Some retirement savings accounts allow for the interest-free withdrawal as long as the money being withdrawn is for a first-time mortgage. The kind of retirement accounts that allow this penalty free withdrawals are usually the individual retirement accounts. Once again, be extremely careful and aware of what the charges and fees associated with an early withdrawals from retirement accounts are. You just might find out that it is chargeable, taxable and subject to a penalty fee if not paid back in time.

Get help from family

A great option to come by is when your parents or your relatives like your grandparents are willing to help you and lend you the money to make the down payment on your home loan. Many times these people are willing to help out their children because they realize that they had financial assistance from family when they first bought the home. The biggest and strongest factor is simply that they love you and might want to help you. They also might have more money accumulated for the future and retirement than they may require. For people who have substantial assets, holding onto all assets until their death can trigger unnecessary estate taxes. Also, these people may be willing to lend you the money as a loan and expect to earn a healthy interest on the loan which may be better than what they are getting from their investment with the banks.

You will have to come up with the topic of giving or lending money to with your parents or a family member in most circumstances. However, if they do happen to mention it first be ready to discuss it in detail.

Look for seller financing

Certain sellers offer financing help to the home purchaser. These sellers usually specify in the advertisements that they are willing to offer you a second mortgage to help you buy the property. A loan given by the seller is usually due and payable in 5 to 10 years and is a kind of a balloon mortgage. This gives you enough time to build up equity or save enough to refinance into a new and a larger 80% conventional mortgage before the seller’s loan becomes due.

The reasons that a seller offers financing help to the buyer could be that he is not in the requirement of the entire amount from the sale of the home. Rather, he wants to earn a healthy interest rate by lending some money to you as a second mortgage. Sellers look at this option sometimes in order to get a good return when they are not completely satisfied with the returns that they are already getting from their usual investments. They just might want to diversify their investment portfolio as well. However, the thing to be careful is that many times seller financing means that the seller is trying to sell a property that has some major flaws and is not selling easily. In all circumstances you should have a proper inspection of the property conducted. It may be especially true when the seller financing is being offered and you want to make sure that the seller is willing to help you for the right reason. Another thing to look at is whether the seller financing rate is as low or lower than the rate you can obtain through a traditional mortgage lender. However, this may not be the only criteria because you may find that you cannot qualify for second mortgage from a traditional mortgage lender. In the end you will have to balance the costs and carefully evaluate what you’re getting into.

Consider 80-10-10 financing

80-10-10 financing is basically about taking a second mortgage to meet the down payment requirement. In this kind of financing, 80% of the home purchase value is taken as a loan, 10% is paid by you as a down payment and the remaining 10% is borrowed from a bank, savings and loan association or other institutional lender to come up with the required 20% down payment. You can get a second mortgage of 10% from the same vendor that you’re borrowing 80% from or from another one. From a l From a lender’s point of view, 80-10-10 financing is as good as 20% down payment.

However, keep in mind that 80-10-10 financing does not mean that you can only make 10% down payment and borrow the other 10. This ratio can be different where you decide to make 5% down payment and borrow the remaining fifteen as a second mortgage which will typically make it the 80-15-5 financing. Once again, you should know that taking a second mortgage will probably have higher interest rate than the first mortgage. This is because the lender considers it a riskier option. Also, the second mortgage on 80-10-10 financing will be lower than the 80-15-5 financing because you are borrowing more on the second mortgage and making and even lesser down payment which means that the risk of default is higher. Second mortgage is usually a balloon loans that become due in 5 to 10 years. This will give you enough time to save enough money or build up enough equity in the house to refinance to a conventional mortgage.

Find a Partner to Buy a Multi Unit Home

If you cannot meet the requirement for the 20% down payment by yourself, it may be a good idea to find out partner for a multi-unit real estate purchase. For example you can find one or two partners in going together to purchase a duplex or a triplex.

Be extremely careful when you get into a partnership in order to buy a building. Consider all possibilities such as what if one of you wants out after a year? One of you fails to pay the share of expenses, what if one wants to remodel and the other doesn’t, and so on and so forth. As with all other partnership agreements, have a lawyer look at your mortgage loan partnership agreement and see that it explicitly deals with all pertinent issues. Facing some major disagreements down the road regarding the home loan can put you in a lot of financial jeopardy and put your home at risk. Choose who you get into a partnership with carefully and deal with all formalities of making a proper contract with all terms and conditions stated even when you are getting together with friends or people you think you know well.

Making The Right Down Payment For A Home Loan

Before you set your heart on a home to buy, you should be acutely aware of the downpayment requirements and if you have enough.

Not having the right amount of downpayment can quickly add to the cost of purchasing the home with additional charges, penalty fees, compulsory insurance and a higher interest rate.

All this can make your dream home suddenly unaffordable. You need to know how much you need to save for the downpayment to purchase a home loan of a certain amount.

Another way to look at it is that you need to know how much you have got saved for downpayment and how home can you afford to buy with the money that you have.

The 20% down payment rule

Whenever you apply for a home loan, you’ll find out that making 20% of the value of the home as a down payment is required. 20% down payment is magical number. It helps you avoid having to take a compulsory private mortgage insurance which can add hundreds of dollars to your mortgage payment. This amount is not 10%, 15% or 25%. It is exactly 20%.

This is because mortgage lenders have calculated over the years that borrowers who make at least 20% down payment on their mortgage home loan are far less likely to default on the loan.

how to make the right down-payment

One reason is that the borrower has too much invested in the property and will not be willing to just walk away from it if the property prices decline or if he cannot make the payments on the home loan anymore, leaving the lender high and dry with the asset that is worth less than what is owed on it.

Another reason is that when the borrower invests at least 20% of the money, even if the matters come to a foreclosure or a short sale, the additional cost that the lender has to undertake in order to sell the home, is usually less than the 20% of the cost of the home.

This means that the lender can avoid a loss as much as possible if he has to sell the property to recover the money.

In order to avoid having to take the compulsory private mortgage insurance, you will need to make at least 20% of the home value as down payment.

It should be clearly understood yet that a private mortgage insurance only protects the lender financially if you default. If you do not make the 20% down payment, not only can you expect to pay a few hundred dollars or even $1000s as PMI every year, you can also expect your mortgage loan to have a worse loan terms such as a higher upfront fee or a higher ongoing interest rate which will increase your monthly mortgage payment itself.

It is also equally important to understand that if you do make a down payment less than 20% and get saddled with a private mortgage insurance payment, it does not have to be the permanent cost.

As soon as you can demonstrate to the mortgage lender that you have at least 20% equity, which is home value minus loan balance outstanding, in your home, the mortgage lender may be willing to forfeit the Pvt. mortgage insurance payments.

The equity in your home can be a result of the rising prices and appreciation of real estate in your area, home improvements that enhance the value of the property or any combination thereof. However, in order to prove that your home has appreciated in value, the mortgage lender will require an appraisal done by a certified appraiser at your own expense.

Also read:

Safe and profitable ways to invest your mortgage downpayment till you are ready to buy.

How to buy a home with less downpayment.

Saving For Retirement Vs Downpayment for Buying a Home

One of the best and most available tax write off method is the funding retirement savings plan. Money that you contribute to an employer-based retirement plan such as a 401K auto 403B or a self-employed SEP-IRA or a Keogh plan is generally tax deductible.This saves you both federal and state income taxes in the year for which the contribution is made.

Additionally all of your money in these accounts compounds over time without taxation. These textual option accounts of one of the best ways to save your money and make it go.

The challenge for most people is keeping the spending down to level that allows them to save enough to contribute to the tax deduction accounts. Suppose you want to save 10% of your income. Thanks to the tax savings that you will net from funding your retirement account if you’re able to cut your spending by just 7.5% and put the savings into a tax deductible retirement account you’ll actually be able to reach your 10% target.

Generally speaking when you contribute money to a retirement account the money remains inaccessible to you unless you pay a penalty. So if you are generating down payment money for the purchase of your home putting that money into a retirement account is generally a bad idea. You will not be able to withdraw the money from your retirement account without owing income taxes as well as penalties. The penalty is usually 10% of the amount withdrawn to the IRS plus also any other penalty your state assesses.

So the dilemma is that you can save outside of retirement accounts and have access to your down payment money but pay much more in taxes or you can fund your retirement account and gain tax benefit but lack access to the money for a home purchase.

There are 2 ways in which you can avoid this dilemma. 1st of all, see if your employer allow borrowing against retirement savings plan balances. If you have an individual retirement account you’re allowed to withdraw $10,000 as a lifetime maximum towards the home purchase so long as you haven’t owned a home for the past 2 years. Tapping into a Roth IRA is better because of it is free from income tax as long as the Roth account is at least 5 years old. Although standard IRA account has no such restriction withdrawals are taxed as income so you will net only after tax amount of the withdrawal.

Since most of us have limited discretionary income, we need to balance the savings. Saving for retirement and reducing taxes is important but if you are trying to save to purchase a home some or most of receiving needs to be outside a tax-sheltered retirement account. Putting your talent savings on the back burner for a short amount of time in order to build up a down payment question is all right. However, be careful to purchase a home that is affordable enough for you to have enough slack in your budget after the purchase to fund your retirement account.

10 Steps To Make Enough Mortgage Downpayment When Strapped For Cash

Gone are the days when mortgage lenders approved loans for the full buying price. Even subprime lenders dealing with borrowers with poor credit rating were willing to take these risks.

However, downpayment is almost always necessary now, although the amount may vary.

20% downpayment is considered to be the magic figure because it helps you avoid the additional cost of private mortgage insurance. You also do not have to pay property taxes in advance to the lender.

However even a 5% to 15% down payment helps in getting the home loan approved. The logic is simple. The more you invest in your mortgage the less likely you are to walk out on it in the future. 

10 Steps To Overcome Shortfall For Downpayment

There can be many reasons why you do not have the available cash to make a substantial down payment on your mortgage. But if you’re resourceful, this can only be a temporary inconvenience. The problem can often be solved with a bit of motivation and discipline.

Even people with high incomes can have a problem making a downpayment because they do not have enough savings.

1) Change your spending habits

If you haven’t managed to save enough money in spite of a regular and good income that perhaps you should cut down on your monthly expenses. The easiest to cut down are nonessential expenses like eating outside, renting movies and shopping for gratification.

Taking help from family it is common enough. Parents lend money to their children. According to the taxation laws anyone can make a gift to somebody for $12,000 each. Each member of your family can receive $12,000 in a given year.

This means that both your mother and father combined can give you $24,000. If you have a spouse than this amount doubles and becomes $48,000. If both your parents and your in-laws are giving you this money as a gift then the amount becomes $96,000. This money given as gift is tax free.

2) Ask your employer/company

If you are relocating to another area because of transfer from your company you can ask if your company will be willing to make an advance on your down payment. Many companies provide mortgage assistance and in some cases help to buy the house outright, but this is usually reserved for senior executives. Even if you are not transferring somewhere you should inquire in your company if they have any program that gives assistance to the employers for purchasing home.

3) Use tax refunds

When you get a tax refund, don’t squander it as a windfall gain. Treat it seriously and save it up towards that mortgage down payment.

4) Withdrawing from retirement plans

The government allows you to withdraw up to $10,000 from your IRAs, provided you use the money to buy your 1st principal residence. To avoid a 10% penalty tax for an early withdrawal you must be a first-time buyer who hasn’t owned a home in the past 2 years prior to this.

The funds must be used within 120 days of withdrawal in order to purchase or build your home. Many 401K plans also permit borrowing for a mortgage down payment. You can check with your benefits office for more details.

5) Get money from existing real estate

If you already own a real estate or vacation home which has appreciated in time you can use the built-up equity to get additional cash. You can either refinance or take a HELOC. You must however understand that whenever you take on an additional loan it reduces your borrowing power according. This is true whether the loan in question is an unsecured personal loan from a credit union, or a secured loan like a car or boat.

7) Equity sharing

This method allows 2 or more people to buy a house jointly. Only one or more people may use the house as a primary residence. For example a non-occupant investor can pay the down payment and closing costs in return for 25% interest in the property. You remain 75% owner of the home and are responsible for paying the mortgage on as well as property taxes and insurance on the house.

Any increase in value is shared according to the terms of the equity sharing agreement either after a specified period of time or when the property is sold.

While this arrangement can be worked out between any people it is common between family such as brothers or children and parents. An equity sharing arrangement can be a profitable agreement for all parties involved. While you are able to make a larger down payment and qualify for a lower interest rate on the mortgage your parents can get tax benefits and profit from the appreciation in the house value in the future.

The most important thing to remember is that when making an equity sharing agreement you must consult a lawyer and make a formal legal document stating all the terms and conditions in order to avoid complications well as potential deterioration in personal relationships in the future.

8) Use state or federal programs for first-time buyers

Freddie Mac and Fannie Mae and the FHA along with many other states have financial aid programs designed to assist low or moderate income buyers in purchasing their 1st home with limited cash down ability.

9) Take private mortgage insurance [PMI]

Having to take private mortgage insurance may increase your closing cost and the loan origination cost. It is also likely to increase your monthly mortgage payment. But at the same time it allows people who are strapped for cash during the time of the mortgage to get that mortgage.

Usually any down payments that is less than 20% off the the borrowed amount calls for the borrower to take on the private mortgage insurance. This insurance might have to be paid to the lender in advance for a period of 6 to 12 months. It is kept in an escrow account and is dispersed by the mortgage lender.

10) Sell your assets

You can generate extra cash down payment by selling some of your assets such as stock options, shares etc. You must understand the tax implications of doing this and to cover for the state and federal capital gain taxes.