B uying a home is one of life’s most significant decisions. You need to give it a lot of thought before making your final decision. The reason for that is simple — it has a lot of financial repercussions that you might not be ready to undertake.
When you buy a home in Minneapolis, one of the most important things to consider financially is the down payment.
How Much You Need for Down Payment
Ideally, you need to pay 20% of the full purchase price as down payment. Doing this will give you the advantage of paying the lowest interest rate and avoiding private mortgage insurance.
For example, if you buy a home priced at $200,000 you need to come up with $40,000 as the down payment, not including the closing fee. That’s a lot of money, but you have to remember that you can get it back in the form of equity in case you decide to sell your home in the future.
The Best Way to Save Cash
The typical source of down payment is cash. You need to figure out a way to put your savings on steroids, so you spend lesser time waiting to complete your down payment amount. Here are two possibilities:
- Consider a money market account or some high-yield savings to hold down your payment funds. With these, you generally get better interest rates compared with a regular savings account.
- Another thing that’s better than regular savings is a certificate of deposit (CD). While you give up liquidity and flexibility with CD, you gain on protection and yields.
Sourcing Down Payment from Your Retirement Plan
Your retirement plan can be a good source for down payment. You can borrow money from your 401(k) and 403(b) and use it as down payment for your new home. On top of that, you can also withdraw money from your IRA account if you happen to be a first-time home buyer.
When making a crucial decision such as buying a home, you have to take into account the short- and long-term issues. Things like how it could affect your retirement assets and your ability to pay off the loan are all considerations that you have to think through.