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Home ownership the smart way

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by Mr. Serge L’africain Fri, Oct 1, 2010
Commercial Banking Manager, Bank of Nova Scotia

If you’re like most people, a home build or home purchase is the biggest financial commitment of your life. For this reason, it makes sense to look at ways to make this commitment a little less daunting.

One of the most effective ways of lowering your costs and minimizing your financial risks when buying or building a home is to save to increase your down payment.{{more}}

Why does the size of your down payment matter? To begin, you need at least a minimum amount as a down payment to qualify for mortgage financing – typically a down payment of 10% of the purchase price or more. But more importantly, the larger the down payment, the less financing you’ll need, which can mean thousands of dollars in interest savings each year and a greater possibility of paying off your mortgage sooner.

If you plan to build or purchase a home in your foreseeable future, this is an excellent time to build your savings to increase the equity in your home and significantly lower your financing costs.

Build your savings with a regular savings plan

One of the most effective ways of saving for a down payment is through a regular financial plan. By making regular, automatic contributions to such a plan, you not only pay yourself first before having second thoughts about spending the money, you also ensure that your savings are automatically invested and begin earning interest as soon as you make them each month.

One strategy you may want to consider is setting aside a regular savings amount that’s equal to what you think your mortgage payment will be when you eventually own your home. Or, if you are currently paying rent, save the difference between the estimated mortgage payments and the amount you pay for rent. This not only gets you used to the financial commitment of carrying a mortgage, it also allows you to build significant savings over a relatively short period of time.

Because your timeframe for home savings is likely shorter-term (less than 10 years in most cases), you should consider investing your savings in conservative interest-bearing investments to ensure your money is available when you need it. While it can be tempting to try to increase your down payment by pursuing the higher potential of stock investments with your savings, such investments are volatile over the short term and could result in net losses rather than net gains.