Saving or Investing to Buy a Home
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Saving or Investing to Buy a Home
The first thing to plan for when it comes to paying for a home is the down payment. Ideally, you want to have a large stash of savings to pay for your down payment. The traditional 20% down has returned after several years of being out of sight. It is still possible to get a loan that requires less than 20%, but it is not easy to qualify for like it was in the 1990s and early 2000s.
Things To Know
- Some retirement plans let you borrow or withdraw funds for a home.
- How long you want to wait before buying a home can determine what types of investments you put your money into.
If you already have 20%, you will not need to pay for mortgage insurance, and you will cut your monthly payments as well. If you can raise more than 20%, so much the better. But if you do not have 20%, there are ways to raise it.
Borrow from retirement savings
401(k)s
If you have a 401(k) plan at work, you may qualify to take loans from it. Certain conditions for the loan, such as loan fees and the maximum term, are set by your employer, so find out what is involved. There is a maximum loan amount allowed—$50,000 or half of your vested amount, whichever is less. Note that because this is a loan, you must pay it back in a reasonable amount of time with interest.
IRAs
If you have an individual retirement account (IRA), you can withdraw up to $10,000 without penalty if the money is used for a first-time home purchase. You must use the money within 120 days. The $10,000 is a lifetime limit, and you may need to pay income taxes on it. However, you do not need to pay it back.
Savings and investing plans
The more you have saved up, the less you will have to rely on loans, and the less you will have to pay each month for your mortgage (and the interest on it). Begin saving as early as you can—some people even start in their teens. Some work an extra job or two to save up funds.
If you plan to buy a house fairly soon, such as within a year or two, you probably won’t want to risk your money. Low-volatility investments such as certificates of deposit, money market accounts, and regular savings accounts can be ideal. You will earn some interest or dividends, but very little growth.
If you plan to buy a house years down the road—say, five years or more—you can afford to put your funds into an investment with growth potential, such as a stock or a mutual fund, or perhaps a commodity such as precious metals. Fluctuations tend to even themselves out over the course of years. These investments carry the risk of loss and should not be entered into without a thorough understanding of their risks.
There is also the option of splitting your money among several investments to achieve different returns.