Saving Up for a New Home

Saving up for a new home can be painless with a little dedication, like lowering monthly utility bills, and some smart investment decisions. Making a downpayment shouldn't break the bank, since buying a new home has many additional costs after closing. You must have money left for repairs, property taxes, homeowners insurance and mortgage. Save enough to put 20 percent down on your dream home while still having some wiggle room, and home ownership will come easily.

In recent years, lenders have made it easier to purchase a home with zero down. This is a tempting offer, but it will cost you in the long run in the form of higher interest rates and private mortgage insurance, a safeguard built into the mortgage payment to cover the lender if you default. These added costs can be avoided if you build at least 20 percent equity into your home. The average home price is just under $200,000, so a solid downpayment will cost you around $40,000.

Investment Options

If home ownership is several years away, investing is the smartest way to grow your capital. Return is directly proportional to return--the higher the risk, the more money you can earn. High risk investing options are viable if you plan to save for 10 years or more. For short term investing, low risk options are the way to go. A turn in the stock market or other financial dip can dash your dreams of home ownership without giving you time to recover if you make a short term, risky investment.

If you plan to buy a home within five years, bank on safe, modest growth. An interest-bearing savings account might earn you 1-2 percent, but you can rest assured that the capital isn't going anywhere. Having a portion of your paycheck directly deposited into the savings account ensures that your savings grow each month. You can also grow capital by taking on a second job, cutting out non-essentials and waiting longer to buy a home, though low interest and low market values make now a golden opportunity to buy property.

Certificates of deposit, or CDs, are safe investments with moderate returns. The money is tied up for the term of maturation, so you cannot access it without paying a penalty until it matures. Money market accounts are low-risk options with low returns that operate much like checking accounts. Money market funds offer somewhat higher returns; they are low-risk options managed by brokerage firms to store money that is not otherwise invested.

If home ownership is 10 years away or more, higher-risk investments can pay off. These investments can be volatile, but relinquishing control over that capital for several years is a worthwhile risk. Stocks are some of the most popular investments. Investors buy shares in a company that are tied to the company's success: as stock increases, shares become more valuable and can be sold at a high price. Many stocks also pay dividends to shareholders, so money is accruing at all times.

Bonds are a way of lending money to a business or government in return for interest. The capital is repaid over time, but there is always a risk that the borrower will default. U.S. government bonds are safe, but offer lower returns than riskier bonds with businesses and other entities.

Mutual funds pool investors' money into buying stocks, bonds and other high-risk, high-return instruments. The advantage of these is diversity: a diverse investment portfolio is safer and more lucrative over time than sinking all of your capital into one investment option. With smart investing, you can be saving up for a new home in no time.

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