cloudyn.png
Sunday August 25th, 2019 10:48PM

Make a home down payment without wrecking your finances

By The Associated Press
Related Articles
  Contact Editor

Maximizing a home down payment can make sense: The bigger the down payment, the lower the monthly mortgage bill and the better the chance of building equity more quickly.

But putting too much down could leave you without enough cash for home maintenance — or anything else.

Pinpointing the right amount involves balancing the advantages of boosting the down payment against the need to hold back money for urgent upgrades, life's emergencies, and having some fun with your new home.

"There's really no one-size-fits-all solution," says Jason Speciner, a certified financial planner in Fort Collins, Colorado.

THE EFFECT OF A HIGHER DOWN PAYMENT

Calculating how different down payments would affect a monthly mortgage payment is eye-opening. Some lenders require only 3% down for conventional home loans, which makes getting in the door easier but means assuming more debt than with higher down payments.

Many borrowers ask if they should scrape together a little more, such as 5% versus 3%, says Rick Bechtel, head of U.S. residential lending at TD Bank. But that probably wouldn't make enough difference in the monthly mortgage payment to justify doing so if it left you strapped, he says.

"The need for post-closing cash is always greater, and sometimes significantly so, than people expect," he says.

But a higher down payment can make a significant difference if it means lowering or avoiding mortgage insurance. The insurance, which can involve upfront and monthly fees, protects the lender if the borrower defaults. Depending on the type of loan, making a higher down payment may eliminate some of that expense, if not all of it.

Kristin Phillips, a Tampa, Florida, psychologist and author of The Debt Shrink blog, says she and her husband, Brandon, couldn't put down the traditional 20%, but they wanted to put down more than the minimum when they bought a home in 2013.

"Ten percent was a good compromise," she says. That kept the monthly mortgage under 25% of their income so they could live comfortably. Eventually they made extra mortgage payments to build enough equity to eliminate private mortgage insurance.

BORROW WITH CARE

When deciding on down payment size, consider its effect on other aspects of your financial plan.

Twenty-nine percent of homeowners ages 21 to 34 borrowed from retirement accounts to help fund down payments, according to the Bank of the West's 2018 Millennial Study.

But the decision to do so shouldn't be taken lightly. Borrowing from a 401(k) is particularly risky. After a job loss, the loan must be repaid by the next tax filing deadline or it's taxed as ordinary income, with a 10% penalty if the withdrawal is taken before age 59½.

Using a Roth IRA to boost a down payment is a better option, says Aaron Clarke, a certified financial planner and wealth adviser at Halpern Financial in Ashburn, Virginia. There are no taxes or penalties on withdrawals of contributions. First-time home buyers who have contributed to a Roth for at least five years can withdraw up to $10,000 of earnings on the contributions, tax- and penalty-free.

But Linda Rogers, a certified financial planner and owner of Planning Within Reach in Memphis, Tennessee, says she doesn't recommend borrowing from retirement savings. Many people are behind on saving anyway, she says, and borrowing from an IRA means losing tax-free growth.

EXPECT THE UNEXPECTED

Thirty-four percent of recent first-time buyers say they no longer felt financially secure after buying their current home, according to NerdWallet's 2019 Home Buyer Report, based in part on a survey of 2,029 adults by The Harris Poll for NerdWallet.

To maintain security, resist draining your savings for the down payment and closing costs. Leave some for emergencies, such as a car breakdown.

"Emergency reserves are for 'Oh, shoot' moments," Speciner says.

And homeownership includes plenty of those. To minimize surprises, review the home inspector's report and negotiate repairs with the seller before purchasing. Budget for immediate upgrades, such as fencing the yard for your dog. Include some cushion.

Alexandra Geneser, a neuropsychologist, used a portion of her savings for a 7% down payment and reserved the rest to remodel a fixer-upper in Charlottesville, Virginia, in 2018. The money for upgrades included a 20% cushion in case the project cost more than expected. The approach left her with enough to create the home she wanted without derailing her financially. "I am so overjoyed with my house," she says.

Finally, leave some cash for fun stuff, like furniture.

"You just achieved a dream," Bechtel says. "You're going to spend money because you'll have rooms you didn't have before."

_____________________________________

This article was provided to The Associated Press by the personal finance website NerdWallet. Barbara Marquand is a writer at NerdWallet. Email: bmarquand@nerdwallet.com. Twitter: @barbaramarquand.

RELATED LINKS:

NerdWallet: Down payment strategies for first-time home buyers http://bit.ly/down-payment-strategies-homebuyers

  • Associated Categories: Associated Press (AP), AP Business, AP Business - Personal Finance, AP Business - Financial Planning, AP Business - Real Estate
© Copyright 2019 AccessWDUN.com
All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without permission.
Make a home down payment without wrecking your finances
Before squeezing every last nickel into a down payment on a home mortgage, set some cash aside for unexpected expenses after closing
10:01AM ( 14 minutes ago )
Putin: NKorea ready to denuclearize _ if it gets guarantees
Russian President Vladimir Putin said after his summit with Kim Jong Un Thursday that the North Korean leader is ready to proceed toward denuclearization _ but needs solid security guarantees to do so.
10:00AM ( 15 minutes ago )
Nissan ex-chair Ghosn released from Japanese detention
Nissan's former chairman, Carlos Ghosn, has been released from detention after a Japanese court rejected a prosecutors' appeal
9:54AM ( 22 minutes ago )
Associated Press (AP)
Father of suspected Easter bombers arrested; Colombo on edge
The father of two of the Easter suicide bombers has been arrested on suspicion of aiding his sons, according to Sri Lanka's prime minister, as investigators continue to search his Colombo mansion for evidence
9:24AM ( 51 minutes ago )
3M to cut 2,000 jobs, 1Q results miss Wall Street's view
3M plans to cut 2,000 jobs globally as part of restructuring efforts
9:17AM ( 58 minutes ago )
Nissan ex-chair Ghosn to be released from Japanese detention
Nissan's former chairman, Carlos Ghosn, is likely to be released soon from detention after a Japanese court rejected a prosecutors' appeal
9:13AM ( 1 hour ago )
AP Business
Booker tax returns show income drop, high charitable giving
Democratic presidential candidate Cory Booker has released 10 years of tax returns, showing his income dipped significantly last year but he remained generous toward charity
6:27PM ( 15 hours ago )
Trump forms battle plan for post-Mueller probes: Just say no
As House Democrats ramp up their widespread investigations into President Donald Trump, the White House's strategy for responding has been simple: just say no.
6:11PM ( 16 hours ago )
Cohen says he pleaded guilty to crimes he didn't commit
President Donald Trump's prison-bound former lawyer told actor Tom Arnold last month that he pleaded guilty to some crimes he didn't commit so his wife wouldn't "get dragged into the mud of this crap."
5:02PM ( 17 hours ago )
AP Business - Personal Finance
Millennial Money: Are you robbing the Bank of Mom and Dad?
Are you hurting your parents' retirement by tapping the Bank of Mom and Dad?
11:23AM ( 1 day ago )
Millennial Money: Ask your folks about their financial plans
Talking to your parents about their financial plans can save your family headaches and messy conversations down the road
10:34AM ( 1 week ago )
Millennial Money: Don't freak out about your emergency fund
An emergency fund doesn't have to be wishful thinking when you're building your financial life
8:00AM ( 1 month ago )
AP Business - Financial Planning
Back to the same record, but it's a different stock market
The stock market went on a harrowing round trip the last seven months, but it may be in a healthier place because of it, analysts say
4:19PM ( 1 day ago )
US stock indexes end mostly lower after listless trading day
Wall Street capped a day of mostly sideways trading Monday with a slight gain for the benchmark S&P 500 index, as a spike in crude oil prices sent energy companies broadly higher
4:55PM ( 2 days ago )
As oil surges, US stocks drift sideways in another muted day
Major U.S. stock indexes are drifting sideways in afternoon trading as a rally in energy companies is mostly held in check by broader declines elsewhere in the market
3:18PM ( 2 days ago )
AP Business - Real Estate
Putin: NKorea ready to denuclearize _ if it gets guarantees
Russian President Vladimir Putin said after his summit with Kim Jong Un Thursday that the North Korean leader is ready to proceed toward denuclearization _ but needs solid security guarantees to do so.
10:00AM ( 15 minutes ago )
Nissan ex-chair Ghosn released from Japanese detention
Nissan's former chairman, Carlos Ghosn, has been released from detention after a Japanese court rejected a prosecutors' appeal
9:54AM ( 22 minutes ago )
FBI, IRS agents search Baltimore mayor's homes, City Hall
Agents with the FBI and IRS are gathering evidence inside the two homes of Baltimore Mayor Catherine Pugh and in City Hall
9:53AM ( 22 minutes ago )
Biden launches 2020 bid warning 'soul' of America at stake
Former Vice President Joe Biden has formally joined the crowded Democratic presidential contest, declaring the soul of the nation at stake if President Donald Trump wins re-election
9:50AM ( 25 minutes ago )
The Latest: Joe Biden to begin campaigning in Pennsylvania
Former Vice President Joe Biden will hit the road campaigning first thing next week in his childhood home state of Pennsylvania
9:46AM ( 29 minutes ago )