How to save for a home down payment

In addition to paying for a home inspection, appraisal and other fees at the closing table, you'll need to provide your down payment. For traditional home loans, you'll need to supply 20 percent of the home's appraised value. If you're getting a mortgage through a special home buyer program, this portion could be much smaller.

Even with these options, many potential buyers still have trouble saving the necessary funds. Luckily, there are many ways you can save more to afford a home down payment.

Here are some saving tips:

• Give up certain luxuries. One of the easiest ways to save more is to reduce unnecessary spending. Create a budget that lists all your monthly expenses and your income. Determine how much of your earnings goes to purchases that can be sacrificed. If, for instance, you and your partner like to dine out every weekend, consider cutting back to one weekend a month. If you're in a rental property, you can also look into finding a more affordable living arrangement, such as a unit with fewer bedrooms, while you continue to save.
• Sell some possessions. If you have a few items in your home that you're not putting to use, consider selling them. Possessions that are collecting dust could be worth a bit toward your down payment. Also, if you have stock options or other financial assets, consider selling them for some additional cash.
• Look into down payment assistance programs. There are many government-sponsored opportunities for potential home buyers who want help. Mortgages offered by the U.S. Veterans Administration, for example, don't require a down payment for qualified borrowers. Mortgages provided by the U.S. Federal Housing Administration also come with down payment assistance, and you could pay as little as 3.5 percent of your new homes appraised value.
• Set up automatic transfers. For some consumers, the task of saving is not a financial challenge as much as a memory issue. Even with monthly savings goals, it can be easy to forget to set aside money at regular intervals. Most banks allow you to automatically move money from your checking account to your savings account on a specific day each month. With this option, you can save with little effort.

A word of caution for certain options

While there are many ways you can save for a down payment, some options should be avoided when possible.

One such savings strategy is cashing in your life insurance policy. Certain policies allow you to either withdraw or borrow against their value, which can be helpful if you need a lot of money in one lump sum. However, you'll likely want to keep this financial assistance. In the event of your death, your family could be burdened with expensive funeral and burial costs, which can be more easily mitigated with your life insurance policy.

You also have the option to pull from your retirement accounts. The conditions vary based on the type of account:

• 401(k) plans: Some employers will allow you to borrow against the value of your account. As long as you repay the amount of the loan, you won't have to worry about getting taxed on the amount you withdraw until you retire.
• Individual retirement accounts: First-time home buyers are allowed to tap into their IRAs for down payment assistance up to $10,000.

With either type of account, future home buyers are cautioned against borrowing from their retirement savings. Doing so can noticeably hinder your savings plan for the golden years and can be financially disastrous if you don't repay the loan.