Start with a down payment

As you form a long-term plan to purchase a home, it can help to start thinking as early as possible about your down payment.

A down payment will give you immediate equity in your home, and it shows financial institutions that you have the discipline to save. A down payment allows you to ask for a smaller mortgage loan amount, which lowers the total amount of interest that you eventually pay.

The ideal amount for a down payment is 20 percent of the home’s price. This allows you to avoid purchasing private mortgage insurance, a form of protection for lenders in the event that you default on your loan. It is possible to purchase a home with a smaller down payment, together with that insurance. There also are programs that offer down payment assistance or favorable terms for future homeowners who meet certain requirements.

But if you are early in your planning, try to aim for that 20 percent mark. You will build up the financial discipline you need to take on a long-term mortgage, and lower the monthly payments you’ll have once the mortgage is active.

Here are some tips you can use as you save for your down payment:

Establish an emergency fund first. If you make a plan to save for your down payment, and those plans are interrupted by an emergency need, this can be disruptive to your savings pattern. If you become demoralized by the setback, it can be tempting to halt your savings entirely. To prevent this, build up your emergency fund first. If an emergency happens, you’ll be covered and your down payment will be protected.

Understand the timeline in which you’re saving. When you’re saving for a major goal, it can help to have a specific figure in mind. You can put together an initial estimate by looking at local realty websites for the prices on homes that fulfill you needs.

On a $200,000 home, a 20 percent down payment would be $40,000. We’ll estimate closing costs at 3 percent, or $6,000. This is a total of $46,000 to save ideally.

As with any large amount, break this down into a number that has meaning for you. Let’s say that you and your spouse choose a period of five years to save. We’ll divide the total amount by 60 months, and divide again, to split the savings between you and your spouse. This comes to $383.33 that you each save every month to meet your goal.

By doing the math early, you can adjust your budget to meet your goals, come up with a realistic timeline, and encourage yourself to save.

Keep your savings out of reach. It can be difficult to hang onto a large amount of cash when you have needs elsewhere in your budget. This especially is true when it’s easy for you to withdraw your money from your account. To protect your savings, put them in a place where you will have some trouble getting to them. Keep those funds separate from your emergency fund, such as in a separate savings account. Savings vehicles such as CDs and money certificates allow you to put your money away for a set period of time, and often pay higher interest than standard savings accounts.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 19 years experience in retail banking and with financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at


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