When you’re in the process of buying a home, you’ll probably come across the term cash reserve at some point. It’s an amount of money that you set aside in addition to your down payment and closing costs when you take out a mortgage.

Purpose of Cash Reserve

The purpose of having one is to provide a safety net in case you encounter unexpected expenses or a financial hardship that affects your ability to make your mortgage payments. By having a one, you can ensure that you can continue to make your mortgage payments on time even if you encounter a setback.

How much cash reserve is needed?

How much of a cash reserve you need will depend on several factors, including the type of mortgage you have and your lender’s requirements. Some lenders may require a certain amount as a condition of your mortgage approval. Generally, the amount of cash reserve required is expressed as a number of months of your mortgage payment, such as three or six months.

Benefits of Cash Reserve

Having one is also beneficial for you as a homeowner because it can give you peace of mind. Knowing that you have a financial cushion can make it easier to handle unexpected expenses that come up. In addition, having one can help you avoid the stress and uncertainty of falling behind on your mortgage payments.

To create it, you can save money in a savings account, money market account, or other low-risk investment vehicle. You may also be able to use certain types of retirement accounts, such as a 401(k), to create a cash reserve. However, it’s important to be aware of any tax implications or penalties associated with early withdrawals from retirement accounts.

In summary, a cash reserve is an amount of money that you set aside in addition to your down payment and closing costs when you take out a mortgage. The purpose of having one is to provide a safety net in case you encounter unexpected expenses or a financial hardship that affects your ability to make your mortgage payments. Having one can give you peace of mind and help you avoid the stress of falling behind on your mortgage payments.