Home Buyers: Save for That Down Payment

Home Buyers: Save for That Down Payment

 

As the mortgage meltdown has spread, lenders are demanding stellar credit and proof of income.  Zero-down payment mortgages have almost disappeared.

 

This means if you plan to buy a home in the next few months, you'll need to put some money on the table.  The Federal Housing Administration offers a 3% down payment loan for low-income and first-time buyers.  But FHA loan limits haven't kept up with home prices in some high-cost areas.  For a private loan, expect to put down at least 5%, and that's assuming you have good credit.  If you want to avoid private mortgage insurance, which will increase your monthly payments, you'll need to put down 20%.

 

You should invest your savings someplace safe so it will be there when you're ready to buy a house.  But you don't have to stuff your money in a mattress.  Some options:

 

Certificates of Deposit: CDs are your best choice if you plan to buy a home from six months to a year from now.  With a CD, you can lock in an interest rate that matches your time horizon.

 

Credit Unions: Credit unions don't advertise much, and you have to be a member to use their products and services.  But if you do a little research, you can find good rates on credit union share certificates which are similar to CDs.

 

High-Yield Savings Accounts: These accounts, typically offered through online banks, are paying rates ranging from 5% to 5.3%, compared with less than 1% for traditional passbook savings accounts.  If the bank is insured by the FDIC, there's no risk you'll lose your money.

 

These rates could fall, particularly if the Fed decides to cut short-term interest rates.  But you can withdraw your money at any time without penalty — an option that makes these accounts a good choice for people who are looking for a home and need quick access to their money quickly.  CDs, by contrast, offer a guaranteed interest rate, but if you withdraw your money before the CD matures, you'll forfeit some of your interest.

 

Are you trying to save to buy a home?  Have you found a particularly good place to stash your cash?  We'd love to hear your comments.