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How to Save for a Down Payment Without Going Broke


If you're looking to buy a new home, chances are you'll need to save up some cash for a down payment. The more you put down at the beginning, the better rates you can get for a mortgage loan, and the smaller your payments will be. Some lending companies may also require mortgage insurance until a percentage of the principal is paid.

It may be difficult to come up with enough money to get your mortgage down to where you want it. Here are a few ideas to help you save for a down payment without going broke:

1. Plan to save

Sometimes the best answer is the obvious one: Save the money aside every payday. Plan to start saving well before you begin shopping for your home. If your workplace allows direct deposit, have the money sent to a separate bank account automatically so you won't be tempted to spend it.

You may be able to borrow against your 401(k) or IRA retirement plan as well. The IRA loan will probably be limited to first-time home buyers and capped at $10,000 ($20,000 if both you and your spouse haven't owned a residence for more than two years).

2. Use first-time home buyer or other programs

State and county programs are available to help you with your home purchase. MaineHousing's First Home Program offers Maine residents low mortgages with little or no down payment. Your loan may also be eligible for assistance from various federal programs such as Fannie Mae or Freddie Mac. Veterans can often borrow with little or no down payment, although some lenders may still ask for a standard down payment.

3. Ask for a gift or family loan

People with money to spare often take advantage of tax laws to reduce taxable holdings by giving "gifts" of several thousand dollars per year. If your relatives are well off, they may be looking for someone who will appreciate their giving nature. The maximum amount allowed for gift exclusion varies from year to year, but one donation might be all you need to knock that mortgage down to a manageable size.

If no one you know has that kind of money to give, you might try a family loan at a substantially better rate than a lending agency will give you. Borrowing from the Bank of Mom and Dad may have hidden costs - like cleaning out their gutters - but if money is tight, it may be the better alternative.

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