Thinking about buying a house within the next three years? Or a bit farther down the road? Timing is everything, and it turns out that this simple question makes a difference. So how much should you put down? Down payment requirements 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 we’ll 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 Veterans Administration loan, PMI is not required.)
Even just 3.5% is a good chunk of money. And whether you’re 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, it’s hard to know what to do with that money you have managed to save. Which brings us to . . .
When are you looking to purchase a home?
1. I want to buy a home within 3 years.
If you’re 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 don’t want to invest this money in anything more risky for such a short period because of market volatility.
Imagine you’ve built up a decent amount for a down payment, which you’ve invested in the stock market. A downturn wipes out 20% of your balance. This will likely prevent you from buying a home within your three-year goal.
2. I want to wait at least 4 years before buying a home.
If you’re not in a big rush, investing in the market might be a better option for you. Should you invest, do so with caution and don’t 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 you’ll 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 you’re selling high and buying low.
If necessary, speak with a financial planner to help you evaluate your options and navigate your choices. An advisor may provide the direction you need to reach your goal of homeownership.
Written by David Yu, CFP®, CERTIFIED FINANCIAL PLANNER™ with over 10 years of industry experience helping people make smart, lasting financial decisions.
Courtesy of Realty Times