#6Save for the down payment on a home.

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.

Planning to buy a home in the next five years?

Here are choices to consider for down payment savings.
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.
Short-term bonds
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.

Make it happen.

Have questions?

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:

  • Housing expenses should not exceed 28% of your pre-tax household income. That includes your monthly principal and interest payments plus all the other related costs, such as property taxes and insurance.
  • Total debt payments should not exceed 36% of your pre-tax income. Total debt includes credit cards, car loans, home debt, etc.

Safe debt guidelines

  • Housing Debt28% of pre-tax income
  • All Debt36% of pre-tax income

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.

Does it make more sense to rent or buy?
Consider renting if you: Consider buying if you:
Don’t have the funds for a down payment Can afford the down payment and monthly payments
Have a temporary housing need Can benefit from income tax advantages of home ownership
Expect your housing needs to change substantially in the foreseeable future Intend to live in the same area for several years
Expect to change your job or career, requiring you to move in a few years Anticipate a stable income
Are not willing or able to deal with general maintenance Want to improve the appearance or structure of the house

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

  • Typically, you can borrow up to 50% of your vested 401(k) balance up to a maximum of $50,000. (Note: Some plans have different rules.)
  • The interest rate you’ll be charged will probably be quite low, perhaps 5%.
  • You’ll most likely have to pay the money back within a specific number of years.
  • You’ll also need to understand the procedures for paying the money back; generally, you do so through an automatic payroll deduction. Of course, you’ll be paying the interest to yourself, which is a good thing.

Understand the risks

  • When you repay the loan, you’re using after-tax dollars, thereby forfeiting any pre-tax advantages of a 401(k) plan. You’ll have to pay tax again when you eventually withdraw the money in retirement, so you’re in effect subject to double taxation.
  • You’ll miss out on the investment potential of the money you borrow. That might not seem too dire in today’s environment, but if the markets start growing while you’re paying the money back, you might miss some real opportunities for growth.
  • Some plans will not allow you to contribute while you have an outstanding loan, which could mean forfeiting a company match. Check with your plan administrator.
  • If you lose your job, you have to repay the loan in full, usually within 90 days, or the loan is treated like a distribution, which means the full amount will be subject to income tax and a 10% early withdrawal penalty (assuming you’re under age 59½).

These are very real risks, so before you embark on this path, make sure you understand them.

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How Schwab Bank can help

Looking for the right mortgage?

Talk to a home loan expert about your unique situation. Call Quicken Loans®, the home loan provider of Schwab Bank, at 877-601-4170.

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