How to Reduce Your Mortgage and Afford a Bigger Down Payment for Lower Rates

Making a sizable down payment is a solid investment when you're purchasing a home, especially if you're a first-time home buyer. This shows your lending company that you have a handle on your finances and can result in a reduced interest rate which, when combined with the lower overall debt remaining, makes for a lower overall cost. A sizable down payment, usually 20% or more, also means you don't have to pay mortgage insurance, which lenders charge to mitigate the potential loss of a defaulted mortgage. But finding that sort of capital can be difficult, even if you save money. Here are a few ways to access that money without over-extending your budget:

Take Advantage of your Roth IRA

There are two basic types of IRAs: traditional IRAs, in which you can invest pre-tax dollars and then pay income tax on your withdrawals during retirement, and Roth IRAs, in which you add post-tax dollars and so can withdraw money tax-free during your retirement. However, IRAs also allow you to pull money for your first-time home purchase; while both IRA types allow this to some degree, Roth IRAs give you the most freedom.

Because you've already paid taxes on Roth IRA contributions (the money you put in the account), you can withdraw it without having to pay additional taxes or penalties. You can also withdraw up to $10,000 of the earnings without having to pay taxes or penalties, so long as the earnings you access are over five years old. Not only does this mean you can pull money from an account that is otherwise inaccessible, that $10,000 has not and will not be taxed. Pulling that extra amount for your down payment, or even for accepted repairs, instead of from your take-home pay could save you hundreds of dollars in taxes.

Budgeting your money for buying a home can seem overwhelming, but planning ahead can also help you avoid costly hurdles. So if you're planning on buying a home in the next few months, start putting aside enough for a down payment to reduce to rate and avoid mortgage insurance. If you're planning for further in the future, also start investing the maximum amount you can into your Roth IRA.

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