If you are in the market for your first home, you might be tempted to skimp on the down payment. After all, there are a number of lenders and government programs that could allow you to buy a home with as little as 3% down, so you can speed the transition from renter to new homeowner.
Even so, that 3% down payment option could be penny wise and pound foolish. Choosing one of those low down payment options might get you in that home faster, but a smaller down payment will mean a larger mortgage payment month after month and year after year. In the end, those increased interest charges will end up costing you far more than the additional down payment.
Getting into your first home with a 20% down payment will also shield you from costly private mortgage insurance (PMI). This special, and costly, type of insurance is designed to protect the lenders in case of default, and making a larger down payment can eliminate those premiums and make your money go further.
So making a 20% down payment is a smart thing to do, but how can you pull it off? If you are shopping for a $400,000 home, making a 20% down payment would mean coming up with $80,000 in cash.
Chances are you do not have that much cash lying around, but there are steps you can take to raise it faster than you think. Here are some smart down payment financing strategies that will pay dividends now and later.
Put Yourself on a Temporary Spending Diet
If you need to raise money for a down payment fast, going on a radical spending diet is one way to do it. You may not like giving up cable for a year or living on beans and rice, but the fact that it is temporary can make that extreme spending reduction easier to take.
Depending on your monthly budget, this radical expense reduction strategy could allow you to finance your down payment very quickly. Once you have the cash in hand, you can slowly increase your spending, but the discipline you have learned might allow you to make some of those cuts permanent.
Go All in with a Side Hustle
It has never been easier to earn extra money, all without the commitment of a part-time job. If you already have a full-time job but need some extra cash, a side hustle could be just what you are looking for.
Whether you drive for a ride-sharing service on the weekends or work online in the evenings, there are plenty of ways to make extra money for your down payment. And by dedicating every extra dollar you earn to the cause, you can raise that money fast, so you can stop renting and start enjoying your brand-new home.
Shop Below Your Pre-Approval Range
Getting pre-approved for a mortgage can give you an edge in a competitive housing market by showing sellers you are serious about your offer. But getting pre-approved is only the start of the process, and it is important to choose a price range and home loan that works for you and your family.
Instead of letting the pre-approval limit be your guide, think about your overall budget and financial position. Shopping below your pre-approval limit could allow you to make a larger down payment, giving you a number of advantages, including a smaller monthly mortgage payment.
There are many advantages to making a larger down payment, and the 20% mark is a good goal to shoot for. If you are a bit short of that goal, the strategies listed above can help you get there fast.