A Great Savings Strategy for First Time Home Buyers

For SaleMany people are looking toward the housing market as a great investment opportunity. After the economic turmoil that has plagued the global economy over the past year there are very few sure bets anymore. The combination of low interest rates and low home prices is beginning to attract the attention of people who would not normally be in the market for a home, but who are now otherwise drawn into the real estate market. One of the biggest hurdles for anyone to overcome when buying a new home, besides securing good financing for their purchase, is coming up with a sufficient down payment. There are a couple of ways to make this hurdle a little easier to pass over if you are clever with the way you save and take advantage of new government-sponsored tax incentives for first time home buyers.

The Obama Administration’s attempt at helping people get back on their feet has also created some really great tax incentives for those in the market to buy a home. People can get up to $8000 in tax exemptions from the government if they purchase a home this year. For many real estate markets that’s enough money to recover a down payment in the form of a tax write-off. Many lending institutions are requiring at least a 3% down payment, and in most cases, the requirement is more like 5-10%. If a homebuyer is looking at a $100,000 home, modest in many real estate markets, their down payment many reach as high as $10,000 or more. Saving for this down payment is likely the largest obstacle faced by many would-be homeowners.

A really great way to save for a down payment, as well as a traditional way to save for retirement is to open up an IRA, specifically a Roth IRA. In doing so you will have a place to squirrel away your retirement savings as well as an excellent way to save for a down payment on a house. If you’re relatively young, say 25 years old, you can contribute up to $6,000 per year into your IRA. And with the Roth variation, you already have paid taxes on the contribution, and can withdrawal the money without having to worry about the government taking its share at that time since they already have taxed the account when the contributions were made. In this way, a potential home-buyer can save for six months to a year towards their down payment in an interest-building account that has already been taxed.

Once a home-buyer has decided on a home and they are ready to put their money where their mouth is, the Roth IRA money can be withdrawn and put towards a down payment. If for some reason the real estate market or the economy go further south in the time that the person is contributing to their Roth IRA, they can reconsider and wait out the poor conditions of the market knowing that at the very least they’ve contributed a very nice chunk of change toward their retirement. As people build for their immediate future, they can always reconsider and realign their savings goals towards their retirement.

So by saving for a down payment on a house via a Roth IRA, a person can have both a great building block for their financial future as well as the option to reconsider and put off buying a home in the short term in favor of keeping their Roth IRA contributions in the basket for retirement. No matter which way the real estate market goes during the time you are building your Roth IRA, the outcome remains the same: a win win for your investment and retirement portfolios.