Want To Buy A House? Heres How To Save For A Down Payment
Written By: David Yu, CFP
Tuesday, March 13, 2018
Thinking about buying a house within the next 3 years? Or a bit farther down the road? Timing is everything and it turns out that simple question makes a difference.
According to Zillow, the median home value in Diamond Bar is 697,000. So how much of that should you put down? Down payments vary depending on the loan type, but in general they are:
0 for VA loans
3.5 for FHA loans
20 for conventional loans
Or use this handy down payment calculator to help you.
20 is the recommended down payment on a house.
You may have heard this before, but well say it again. Try to put at least 20 down. Why? If you finance more than 80 of the home value, you will have to pay Private Mortgage Insurance PMI. But if you can take out a VA loan, PMI is not required.
Even just 3.5 or 24,395 on a home in Diamond Bar, CA is a good chunk of money. And whether youre fighting the good fight as a small business owner, still paying back those student loans, or just trying to save a bit each month like all of us, its hard to know what to do with that money you have managed to save. Which brings us to hellip;
When are you looking to purchase a home?
1. I want to buy a home within 3 years.
If youre looking to buy sooner rather than later, consider keeping your money in a cash account, like a savings account or something similar. Remember that savings accounts will yield greater interest than a regular checking account. You dont want to invest this money for such a short period because of market volatility. Just think:
Imagine youve built up a decent amount for a down payment and you invested this money in the stock market. A recession comes and you take a 30 hit on your balance. That will likely prevent you from buying your home within your three-year goal.
2. I want to wait at least 4 years before buying a home.
If youre not in a big rush, investing in the market might be a better option for you. Should you invest, do so with caution and dont be too aggressive. Be smart, calculated, and balanced with your portfolio picks. Make sure you have a healthy mix of stocks and bonds. And keep in mind that youll want to rebalance your portfolio at least once a year. Why?
Imagine that you have a portfolio of 10 different stock and bond ETFs, or Exchange-traded funds. Each ETF is invested at a fixed percentage of your overall portfolio. As the year goes on, the allocations will wander from their targets. Those doing well will become a larger part of your portfolio. Those not doing so well will become a smaller part of your portfolio. When you rebalance, you bring things back in line with your target percentages, so youre selling high and buying low.
Also keep in mind dollar-cost averaging, or investing a certain fixed amount on a regular schedule. Basically, you buy a larger number of shares when the markets are down and everything is at a lower price, and fewer shares when prices are high. This is recommended over making large, infrequent, lump sum contributions because it will bring the average cost per share down over time.
If these investing ideas are a bit daunting to you, youre not alone Speak with a financial planner to help you evaluate your options and navigate these uncertain waters. An advisor can be just the direction you need to reach your goal and buy a house.
David Yu, CFPreg; is a CERTIFIED FINANCIAL PLANNERtrade; with over 10 years of industry experience helping people make smart, lasting financial decisions. Visit www.pacunited.com for more information.
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