Usually the greatest obstacle to making that home purchase is coming up with the infamous down payment, or as some like to call it, the "down painment." This is particularly true of first-time home buyers, but can plague second-home buyers too. While saving is the most obvious way to muster up the needed cash, borrowing can be an answer too, especially to fill any gaps. Following are some unique and effective ways to both build your savings and expand your borrowing capacity.

Building Your Savings

Many people think they're already putting as much money into savings as they possibly can or are willing to. The truth is, you can still probably accumulate a nice chunk of change through simple changes in the way you invest your money and manage your spending. Fortunately, these changes need only be temporary. Don't forget that any amounts you save will earn interest month by month, assuming you don't just leave the money in a no-interest checking account.

Now that you've resolved to pack your own sandwiches, here are four more, potentially bigger-ticket ways to save towards a home. The first two focus on growing your money, while the latter two look at ways to curb your spending.

Put Your Existing Savings into CDs

You've probably saved up some money already, or you wouldn't be dreaming about buying that first or second home. The question is, where is that money being kept, and is it earning as much as interest as it could? One safe, yet potentially high-interest investment vehicle is a certificate of deposit (CD).

CDs are offered by banks or thrift institutions (savings and loans, and credit unions). They tend to offer higher rates of return than comparable low-risk investments such as savings accounts or money market accounts. Yet they aren't as volatile or risky as stocks, bonds, or mutual funds.

If you're planning to buy your home tomorrow (or you have a fear of commitment), stay away from CDs. The higher rates of return require you to lock in your money for a specified period of time, which could range from less than a month to ten or more years. The longer you lock in, the higher the rate of return. And if you withdraw money before the CD matures You'll be socked with a penalty, usually calculated as a portion of the interest you would have otherwise earned, such as 90 days worth of interest.

If, on the other hand, you're still some years away from buying your home, you can take advantage of what's known as a "ladder strategy." This involves spreading your investments among CDs with differing maturity periods. The result is that you maximize your rate of return while retaining access to some of your money on a yearly basis.

For example, suppose you have $9,000 to invest in CDs over a three-year period. Rather than tying up the full amount in one, three-year CD that's paying 4.17%, you could split the amount into even yearly increments, as follows:

• $3,000 into a one-year CD that's paying 3.6%
• $3,000 into a two-year CD that's paying 4%
• $3,000 into a three-year CD that's paying 4.17%.

The result would give you a 3.92% average rate of return while freeing up $3,000 (plus interest) each year. If interest rates climb during one of these years, you can reinvest the freed-up money in another CD at a higher rate. If interest rates fall, you can shift the money to a better paying investment such as a short-term bond.

Reduce the Amount Withheld from Your Paycheck

Do you receive a tax refund each year? If so, you're probably having too much money taken out of your paycheck for income-tax purposes. The more personal allowances (married, single, number of dependents) you indicate on your Form W-4, the less money will be withheld from your paycheck.

What's wrong with receiving a tax refund each year? Nothing, if you don't mind giving Uncle Sam an annual interest-free loan. By overpaying throughout the year, you're allowing the government to use your money in any way it wants until you finally claim what's yours in April. You're better off keeping that extra cash and investing it throughout the year, to help grow your down payment.

At any point during the year, you can change how much or how little is withheld from your paycheck by completing a new Form W-4 (available at www.irs.gov). Just don't take too many personal allowances, or you may get walloped with a tax bill at the end of the year.

Stop Carrying Credit Card Balances

Put it on the plastic? can seem like such a good idea at the time. But if you habitually carry over credit card balances from month to month, you're spending far too much on interest, and hurting your ability to save up for a home.

The average U.S. household has more than $8,000 in credit card debt. Assuming an 18% interest rate and no additional charges added, it would take one of these average households 14.8 years to pay off that balance and cost about $4,716 in interest alone. Ouch! That's $4,716 less to put towards a home.

One surefire way to save money is to pay off your credit cards in full each month. Consider the following three-step approach to ending your credit card balances:

• Step 1: Cut up all but one of your credit cards. Most people carry between three and four credit cards. If you're a multiple-card carrier, your opportunity to charge something is that much higher. Remove the temptation by cutting up all but one of your cards. Which one should you spare? Keep the one with the lowest interest rate or best cash-back plan.
• Step 2: Pay with cash or not at all. If you can't pay for something with the cash in your bank account, you can't afford it at least, not while you're trying to pay off your credit card balances. (You don't have to carry around actual cash a checkbook or ATM card will do.) Instead of whipping out the plastic and adding to your ever-growing mound of debt, simply walk away from the item or service you're considering.
• Step 3: Pay down high-interest cards first. Even a minor difference in interest rates can make a difference. Pay as much as you can each month on your highest-interest-rate card, and make the minimum payments on your other cards. Once the highest-rate card is paid off, follow the same approach for the next highest card, and so forth until all of your balances are wiped out.

Once your credit card debt is under control, keep your spending habits in check by minimizing use of your credit card (not cards, since you cut up the others in Step 1). Take the money you were using to pay off your balances and squirrel it away in a low-risk investment such as a CD.

Minimize Nonessential Expenditures

It's amazing how much money you can spend without even thinking about it. Conversely, you can save an impressive amount by putting your brain into gear.

Minimizing, or even eliminating, nonessential expenditures is the quickest way to build up savings. What's a nonessential expenditure? Anything that falls outside the big-three categories of food, shelter, or clothing and even some of the more expensive or excessive items that fall within them. Regular restaurant visits, for example, are definitely a nonessential expenditure, despite the fact that you receive food there. Buying new slacks for work? A necessity. Buying a new Armani suit because your coworker has one? A nonessential expenditure.

Examples of other nonessential expenditures include:

• vacations and weekend getaways
• movies or renting DVDs
• cultural events (museums, theater, symphony)
• sporting events, and
• luxury shopping or even compulsive discount shopping.

In the end, it's up to you to determine what you believe to be a nonessential expenditure, as well as the degree to which you want to cut back. Remember, you don't need to go cold turkey here, just turn it back a notch or two. Explore the many ways you can have fun for free concerts in the park, no-entry-fee days at your local museum, a potluck or game night with friends, or a library book. The more nonessential expenditures you identify and the more you trim back, the faster you'll be able to save.

Borrowing What You Can't Save

Borrowing can certainly be a viable options to help boost the size of your down payment, which ideally should be 20% if you want to avoid being required to pay PMI (private mortgage insurance). Following are three non-traditional avenues for borrowing which can often provide you with a much lower interest rate or even no interest rate at all.

Borrowing Against a Life Insurance Policy

If you have a life insurance policy, you may be able to borrow money from it for your home. You don't even have to die first! You do, however, need to make sure you have a permanent, instead of a term life policy.

• Permanent life insurance provides coverage for as long as you live (assuming you pay your premiums in a timely manner). It combines the death protection of term life insurance (described below) with an investment component that builds a cash value over time. This is what you can borrow against (interest-free, no less). Plus, as long as your loan balance remains less than the cash balance in your life insurance account, you aren't required to pay the loan back. Of course, when you die, the amount you borrowed will be deducted from the payout to your beneficiary.
• Term life insurance is meant to provide temporary life insurance to people on a limited budget, for a specific period of time. The time period can be anywhere from one to 30 years. Beneficiaries receive the face amount of the policy upon the insured person's death. You can't borrow against term life insurance.

If reading your life-insurance policy materials leaves you unsure about which type of policy you have, contact the company that sold you the policy.

Getting a loan from family and friends

You may be able to arrange a private loan from a family member, friend, or someone else you know preferably in writing, with legal protections for your lender. A private loan offers potential benefits to everyone involved.

For you, it can be very flexible (depending on your relationship with your private lender). For example, you and your family member or friend may decide that you won't start repaying the loan for several years, or your private lender may decide to periodically forgive loan payments throughout the year, perhaps as a means of family wealth transfer. And you can usually take a federal tax deduction for mortgage interest paid on that loan.

For your lender, the benefits may include higher interest than he or she could obtain on a comparable investment such as a CD or money market account, as well as the satisfaction of keeping all interest payments within the family or a circle of friends.

Second-Home Buyers: Use the equity in your primary home

If you're looking to buy a second home, one way to come up with your down payment is to borrow against the equity in a primary home through a home equity loan, a home equity line of credit, or a cash-out refinance. Many people are confused about the differences between these three. (It doesn't help that the phrases are sometimes mistakenly used interchangeably.) In each case, the loan is secured by your primary home.

• Home equity loan. Also called a second mortgage, this is a loan that you take out on top of the existing loan (first mortgage) on your primary home. A home equity loan usually has a fixed interest rate (one that doesn't change over the life of the loan). The loan must be repaid over a set amount of time, typically less time than the loan length on your primary home about ten, 15, or 20 years. Interest rates on home equity loans tend to be a point or two above the rate someone could get on a loan for a primary residence. Although you can use this loan towards your second home, your primary residence (and not your second home) will secure the loan.
• Home equity line of credit. Commonly referred to as a HLOC (pronounced "he-lock"), this is a revolving line of credit from which you draw. It's not unlike a credit card. Your credit limit (the maximum amount you can borrow at any one time) is set by taking a percentage (usually around 75%) of your primary home's appraised value and subtracting it from the outstanding balance on your mortgage. As with home equity loans, interest rates on HLOCs are usually a point or two above current home mortgage rates. HLOCs are available only as variable-rate loans (the interest rate moves up or down based on an external index). However, you can usually find a HLOC that offers a low introductory fixed rate for the first six or so months, after which the rate becomes variable.
• Cash-out refinance: This is a way to physically get cash out of your current house based on the equity you have built up. What you do is refinance your house for more than the amount you owe on it. You then put that extra money towards your second home. A cash-out refinance should cost you about the same, in terms of your interest rate and other loan-related costs, as if you had refinanced without taking out any extra cash. Just make sure you don't take out too much if the loan-to-value (LTV) ratio on your current house hits 80% or higher, you'll have to pay for private mortgage insurance (PMI).

By using a combination of saving and borrowing, you can amass a nice chunk of change to cover your down payment, closing costs, and other upfront home-related expenses.

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