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How to manage the high price of a down payment on a new home

Recent leaps in home prices have raised cash demands on buyers. When the median price of a home in Miami climbed to $560,000 in March from $345,000 three years earlier, that appreciation added $43,000 to a 20% down payment.

Where can buyers find that upfront cash if they don’t sell their old home and roll over the sales proceeds, or if they want to retain the residence? There are a number of ways to save. And for first-time buyers, there are programs to lighten the financial burden.

The first step is to create a budget with a loan officer. That person will explain down payment options and provide an estimate of closing costs.

A larger downpayment will save you money by eliminating private mortgage insurance, or PMI. The monthly PMI premium on a typical Miami home with a 5% downpayment would be $257 per month, according to NerdWallet. The company says you could expect to pay $30,087 over seven years until you become eligible to cancel the policy. Note: The lower your credit score, the higher the premium will be.

Here’s how to save for a larger downpayment:

  • Cut back on your expenses and deposit the money every month into a savings account. Once you reach a minimum balance for a money market account, move your money there to earn a higher yield.
  • Remember the expression, “Pay yourself first?” Do that with your checking account. Each time you receive a direct deposit of your salary or other regular payment, automatically move a fixed amount into your savings or money market account. That way, your savings balance will rise every month.
  • Turn your spare time into a paycheck. Consider taking a part-time job, work as an independent contractor, or launch a business. Put all the money you make after expenses into your savings account.
  • If you already own a home and are not going to sell it, borrow against its value and use the cash for the down payment. Open a home equity line of credit or loan well in advance of when you will start house-hunting.

You do not have to come up with all the money by yourself. Family members can contribute to the down payment. A newlywed couple can set up a wedding fund and a college graduate can establish a similar gift account provided the money is received within 90 days of closing.

If you are a first-time homebuyer, look for special programs designed just for you. Fannie Mae offers a HomeReady Mortgage with a down payment as low as 3%. Gifts, grants and other sources of financial support can cover your entire contribution. Freddie Mac has a near-identical program called HomePossible.

Search online to see whether you qualify for an affordable housing program in your city, county or state. You may be eligible for a newly constructed home at below-market prices with more favorable financing terms.

Don’t be shy about asking the seller to contribute toward your closing costs. The freed-up cash can be put toward the down payment. If the seller will finance part of the purchase price, you can reduce your first mortgage by enough to meet the minimum to avoid PMI.

Between now and August 28, Tropical Financial is helping buyers with closing costs through its Home Advantage Program. The money saved can be put toward the downpayment, making owning a new home that much easier.



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