Once you decide you would like to own a home, it may be several more years before you are actually able to buy one. One of the biggest hurdles is saving for the down payment.
Of course, you could try to get a loan with less than 20% down, and in some areas of the country where basic homes can run $500,000 or more, that may be what you need to do. However, if you live in an area of the country where you can buy a nice home for $300,000 or less, aiming to save the 20% down first is a worthwhile goal.
You’ll not have to pay private mortgage insurance (PMI), which can save you quite a bit of money over the course of your home loan.
As you save, you’ll want to keep your down payment fund liquid, but you’ll likely want to put it somewhere that you can earn interest, at least more than you can in a savings account. Here are 3 places you could consider:
1. Term Deposits. Compare banks and look for those like Heritage that offer fairly high term deposits. The longer you keep your money in the term deposit, the higher interest rate you’ll receive, generally. However, be conservative with your time estimate. If you think you won’t buy a house for 3 more years, you may want to put your money in for a shorter amount of time than that so you don’t have to pay a penalty if you decide to withdraw the money sooner.
2. Money market accounts. Money market accounts usually pay a higher interest rate than regular checking or savings accounts, and you are allowed to write a certain number of checks a month against the account. While you won’t make as much in interest as you will with term deposits, you have greater access to your money.
3. Your IRA. You can also funnel some of your down payment savings into your IRA. You are generally allowed to withdraw $10,000 penalty free for the purchase of your first home.
Saving 20% down for your home takes time, but doing so is well worth it when you consider how much you will save in PMI. Just make sure to stash your money in a safe investment that will also give you a fair interest rate in return.