Top Ways to Make a Down Payment
A house is one of the most expensive purchases most people will make. After deciding on a mortgage option, funding the down payment can be a daunting task. Luckily, there are many sources that borrowers can tap to make it easier to provide the amount they owe upfront for their home. Read on to learn about five ways to fund a down payment.
Build Personal Savings with Certificates of Deposit
Savings accounts, money market accounts, and mutual trust accounts are all ways to allocate money for a down payment. Another lesser-known form of personal savings is certificates of deposit (CDs). To purchase a CD, people make an agreement with a bank to deposit a lump sum of money and not withdraw it for a predetermined amount of time. There are pros and cons to CDs. For example, penalties may apply if money is pulled from the CD early. Penalties for early withdrawal on a CD can range from three months to one year's interest. While it might be worthwhile to save the borrower a great deal of interest on their mortgage, it can mean winding up with less money than was originally deposited if taken out too soon.
However, it is possible to negotiate with banks to reduce or waive penalties. While banks are not obligated to waive penalties, they legally have the option to do so. Borrowers are most likely to get fees waived at a small community bank where they have an ongoing relationship.
Fund a Down Payment with IRA Contributions
Funds put into a personal retirement account can be used toward a down payment on a house, with a few caveats. With a Roth IRA, any contribution can be withdrawn at any time without penalty. This is because contributions to these accounts are made after-tax. A penalty may be assessed on any interest withdrawn if it's over the withdrawal limit for buying a home.
A traditional IRA is funded with pre-tax dollars. Because of this, there is often a penalty if that money is withdrawn. However, tax law makes an exception for first-time homebuyers. Those getting a home loan for the first time can withdraw up to $10,000 toward their down payment without a penalty.
How to Use 401(k) Contributions For a Down Payment
Workplace retirement plans can also be used, but the rules for them are more stringent. There are two paths to using 401(k) funds toward a down payment. The first is to take a loan against the account. Borrowers can withdraw up to $50,000 from their 401(k). They will be required to pay interest on this loan; however, the interest becomes part of the account's balance. The loan must also be paid back within five years to avoid penalties.
The other option is withdrawing money from the account. However, this is often an expensive option that might not be worth the extra cost. Borrowers will have to pay income tax on whatever they withdraw. The withdrawal will also be subject to a 10% penalty if the borrower is younger than 59.5 years old.
Gifts from Family Members Can Be a Win-Win for Down Payments
If a parent, grandparent, or another family member gives a gift toward a down payment, this can benefit both the giver and receiver. The IRS permits gifts of up to $15,000 tax-free each year. A couple can each give $15,000 for a total of $30,000 without any tax impact. Gifts toward down payments will have to be documented with the lender. Typically, this involves a letter confirming the gift and the relationship between the giver and the receiver. When looking to sell a home, this strategy can be used to reduce capital gains tax amounts.
Down Payment Assistance Programs Reduce Rates
While these don't provide funds toward down payments, they can reduce the amount that is needed. The Federal Housing Authority (FHA) has loans for first-time buyers with down payments as low as 3.5%. Veterans and active-duty service members can get low or no down payment loans through the VA. Many banks also have private loan assistance programs for first-time buyers.
Take the First Step Toward Owning a Home
Coming up with a large amount of money all at once can be intimidating. But, with some creativity and research, the money for a down payment on a home can be found. By considering all the possibilities, borrowers can put together what is needed and begin their journey toward owning a home.