Owning a home is a compelling goal, and saving for a down payment may be a priority. If you’ve mastered savings fundamentals one through four, or if you feel that your personal circumstances are right for buying a home, here are some things to consider.
|Short-term CDs||Choose a CD that matures when you plan to buy your house. CDs are FDIC-insured.|
|Money market funds||Choose these when you start shopping for a house and want quick access to your money. While relatively stable, funds are not FDIC-insured and could potentially lose money.|
|Checking or savings||Look for accounts that offer a competitive yield. Money is immediately available and FDIC-insured.|
and bond funds
|Choose bonds that come due when you're ready to buy or funds containing high-quality bonds (“A” or better credit rating). Values fluctuate.|
|Treasury bills||Choose a maturity that matches your plans. Values fluctuate prior to maturity. T-bills are backed by the U.S. Treasury.|
What can I afford?
Whether you’re looking at a fixer-upper or the house of your dreams, there’s one basic question that you have to answer before you do anything else: Can you afford it? The answer doesn’t have to be complicated. It really comes down to your monthly income and your other financial obligations.
Here’s a simple industry rule of thumb:
Safe debt guidelines
Start by doing the math. If you make $50,000 a year, your total yearly housing costs should ideally be no more than $14,000, or $1,167 a month. If you make $120,000 a year, you can go up to $33,600 a year, or $2,800 a month—as long as your other debts don’t push you beyond the 36% mark.
Am I better off renting or buying?
Owning your own home may be part of the American dream, but in some instances it makes more sense to rent. Yes, your monthly rent check is a recurring cost you’ll never get back. But owning a home involves a lot more than just paying your mortgage.
What’s best for you? Here are some guidelines.
Can’t I tap my 401(k) for a down payment—without penalty?
Yes, you can, but Schwab does not recommend doing so. Funding your retirement should take priority over buying a home, and borrowing for a down payment should only be considered if (1) you’re confident that you can pay 401(k) money back in a timely fashion and (2) you can continue contributing to your 401(k) as you repay the loan. But think carefully before you leap.
Understand the terms
Understand the risks
These are very real risks, so before you embark on this path, make sure you understand them.