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10 ways to come up with a home down payment

By Kay Bell •

You've found the perfect house. Interest rates are are still low. There's just one thing standing between you and your dream home: a down payment. Don't abandon your homeownership quest just yet. Here are 10 ways to come up with the cash for your new castle.

1. Pay off your plastic.

Paying bills is not fun, but it definitely will help in your hunt for down-payment money. When you carry a credit card balance, the ever-accumulating interest charges mean more of your money goes to the card company each month. Keep that cash for yourself by cutting your debt load. With Bankrate's payment push system, you prioritize your debts and pay the most on the one with the highest interest rate. Once that's paid, shift your focus to the next highest rate and so on. You'll get the most money-sucking credit card bills out of the way more quickly, freeing up more of your income to go toward building your savings.

2. Ladder CDs to boost savings.

Once you've got a few extra bucks, put it to work making more money for you. Many investors prefer certificates of deposit. They are low risk and relatively accessible. But when interest rates are low, the return isn't always what a saver hopes for. You can maximize the earning power of CDs by buying different certificates at varying maturity dates. For example, instead of buying one big CD, parcel out your money into three-month, six-month and one-year certificates. Known as laddering, this gives you flexibility to adjust your savings as rates change. Laddering allows you to lock in when rates are high or, when rates are not so good, the process keeps you from being stuck for too long with low earnings.

3. Use special programs.

There are many programs for home buyers in down-payment distress. Borrowers in a wide range of incomes, locales and professional groups may have access to aid from Fannie Mae and Freddie Mac, the government-sponsored offices that buy mortgages and package them as investments. Various nonprofit and community groups also lend a hand to buyers struggling to put money down on a home. And don't forget about assistance from state agencies.

4. Tap your IRA.

If you're looking to buy your first home, let the Internal Revenue Service help. Tax laws allow you to use up to $10,000 in IRA funds as a down payment if you've never owned a house. If you're married and you both are first-time buyers, you each can pull from your retirement accounts, meaning a potential $20,000 down payment. Even better is the IRS definition of first-time home buyer. Technically, you don't have to be purchasing your very first abode. You qualify under the tax rules as long as you (or your spouse) did not own a principal residence at any time during the two years prior to the purchase of the new home. In these instances, Uncle Sam waives the penalty for early withdrawal, but you may owe tax on the money depending on the type of IRA. Many cash-strapped home buyers, however, find the long-term return of investing in residential real estate is worth the short-term tax bill.

5. Borrow from your 401(k).

Do you have more retirement money in a company savings plan? Consider borrowing against your 401(k) for the down payment. There are down sides to this strategy: Unlike an IRA home-related withdrawal, you'll have to pay back any money you take out of your company plan. The repayment will cost you a bit more since the account contributions were made with pretax money, but your payback will be made with after-tax dollars. At least the interest payments on this loan will be going back into your 401(k).

6. Get a gift.

Aunt Edna always liked you best. Take advantage of that favored family status and ask her to make a present of your down payment. Tax law allows gifts of several thousand dollars a year to be bestowed without tax consequences to either the giver or recipient. The gift-exclusion amount is adjusted annually to reflect inflation (it's $11,000 for 2004 and expected to remain at that level next year, too), so check with the IRS to ensure guidelines are met. Many wealthy people use this tax rule to reduce potentially taxable estates while they're still around to get the thanks. Not close to your family? Not a problem. The gift exclusion isn't limited to relatives. The monetary present can be from anyone, so track down a well-off friend now!

7. Ask for a raise.

No luck finding a benefactor? Then maybe it's time to ask your boss for more money. Just remember, cautions our career expert Penelope Trunk, he who establishes the pay mark first generally loses when it comes to setting a salary.

8. Get a second job.

OK, so you work for the original Ebenezer Scrooge and he humbugged your raise request. Moonlighting could help you earn the extra money. This option makes the most sense for those who are young and not yet fully established in their professional lives.

9. Look for lost loot.

Around $9 million worth of savings bonds are sitting around, ignored by their owners and not earning a penny of interest. Do you have any stashed somewhere? Make sure your bonds are still adding to your net worth. If they're not, cash them in and reread item two above about laddering CDs.

10. Auction off unwanted items.

You didn't find any forgotten riches as you were digging through the attic, but there was plenty of other junk up there. Transform it into your down payment. Thanks to eBay and similar sites, it's never been easier to prove that one person's trash is another's treasure. Check out Bankrate's tips for selling in an online auction. Then clean out the closets and log-on.

-- Updated: Oct. 12, 2004

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