The Lowdown on Down Payments

Down payments are typically 5% to 20% of the purchase price of the home. There are some programs available to first time homebuyers that are as low as 1% to 3%. There are two obvious sources for your down payment. If you already have a home, then the proceeds from its sale can be plowed right back into the down payment for the new residence. Otherwise, most people tap into their savings to make the down payment.

If you have a 401(k) plan at work, you can use it for a down payment for to “buy, build or rebuild” your first home. There are two ways to do this. The first is to take a loan from your 401(k). This type of transaction has no penalty associated with it and the interest you pay on the loan will actually be credited to your 401(k) account. You repay the loan with monthly payments to the account.

The second way is an early withdrawal from your 401(k) account. This type of transaction is also exempt from the 10% penalty but you do have to pay taxes on the income. So, if you withdrew $20,000 to purchase a home and your tax rate is in the 28% bracket, you will owe $5,600 in taxes, leaving you $14,400 for a down payment.

“Parent power” has added some new twists for first-time buyers. Following are some ways your parents can help you finance a down payment for your new home.

Home Equity Loan – Parents often have considerable equity in their own homes and can get a home equity loan that is then gifted to the children to buy a home. Lenders often require a “gift letter” to verify that parents don’t expect repayment. Ask your tax adviser for current rules and regulations regarding this strategy.

Shared Equity/Profit Sharing – In return for providing a part of the down payment, parents share in the profit of the house when the homeowner eventually sells the property.

Life Insurance –If you’ve built up some cash value in your life insurance policy over the years, you may be able to borrow against if up to the accumulated cash value. The interest rate is often more favorable than other types of loans.

Stocks and Bonds – If the market doesn’t allow you to sell your stocks and bonds now, you may be able to get a bank loan using your portfolio as security.

Mortgage Calculator l The Lowdown on Down Payments l A word about Credit Histories l Other Considerations l Mortgage Related Closing Costs

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