There are many factors that go into obtaining the financing you need to buy a home. Coming up with the cash for your down payment is one that most people don’t realize. Coming Up With Cash for Your Down Payment
The old saying is cash is king. This may or may not be true in our digital age. That being said, cash definitely has a place in your mortgage financing. Specifically, the more you can come up with, the better. It will lower your loan to value ratio, which makes it more likely you will get the loan. If you put down 20 percent or more, you will also avoid paying for mortgage insurance, a general request from lenders. Finally, the more you can put down now, the less you will owe and the lower your payments.
When it comes to putting together cash for your down payment, the obvious issue is finding it. Traditionally, people have just saved and saved until they have enough. This is still the basic approach, but there are some other resources you might look to for the money.
If you save for retirement with a 401k plan, you may be in for some good news. If you have worked for the company for more than two years or so, you can borrow against your account. Every 401k plan has its own regulations, so you need to find out from your employer what you can and cannot due. In general, you can borrow up to 50 percent of your vested interest. You need to be careful when doing so. The borrowed amount has to be paid back over five years with interest. The interest payments are not deductible, but you are at least paying yourself instead of a lender.
Staying with the retirement planning theme, there is another area you can use for cash. The federal government views home ownership as a savings mechanism for you and me. Since we historically don’t save money well, the government is motivated to get us into housing which naturally creates equity for us so long as we pay our monthly mortgage. To this end, you can now borrow $10,000 from your IRA to buy a home. This is only true if you are a first time buyer. If you are married, you and your spouse may be able to each borrow $10,000 against your IRAs, but make sure you check with an accountant first as the rules are complex.
Coming up with cash for your down payment may seem a difficult task. As you can see, however, there are more options out there then you might first assume. Check around to see your options.
Dan Lewis is with Great Western Mortgage - mortgage brokers providing home loans.
