How to Save for a Down Payment on a House
A great way to prepare for homeownership is by saving for a down payment. Depending on the specific lender you ultimately choose, the typical down payment ranges from 5% to 20% of the total cost of your new home. The days of "no down payment" are pretty much over so it is important to begin saving now so that you are financially prepared when the time comes to make your purchase.
If you are currently paying off student loans, credit card debt, and other typical living expenses, the thought of putting aside money for a down payment may seem nearly impossible to even consider. But with patience and determination (and some smart financial planning) you can be on your way to achieving your dream of homeownership.
Financial experts routinely suggest the following ideas when you are starting to save for a down payment on a house. Even if you are already saving towards this goal, these steps can enable you to grow your savings even more. These tips can help you determine how much you need to save and how to build your savings over time.
Planning For Your Down Payment
- Speak with a lender. It never hurts to get a professional opinion about financial matters. Contact a mortgage lender and go over your current financial situation and what your goals are for the future. Consider speaking with a real estate agent as well.
This should give you a clearer picture of what home prices are in your area which will help to determine the amount of down payment you will need.
Figure out how much you need. This amount will vary according to the purchase price of your home. Generally you will need to pay at least 5% but it can be as much as 20% of the total price. Remember that the more money you put down, the more attractive you will be to lenders. You will also have to borrow less money so your monthly payments will be lower. Plus you will pay less interest over the life of your mortgage loan. Additionally, if you put down at least 20%, you are not required to add private mortgage insurance (PMI) to your payments.
Note: Financial experts (and most lenders) suggest that your monthly mortgage payment (including insurance and taxes) should not exceed 28% of your total monthly income.
- Determine a reasonable timeline. Once you have calculated approximately how much you need to save, you can start to gauge how long it will take you to reach your goal. You will need to go over your budget and honestly look at your income and expenses to arrive at a number that you can put aside each month. It may take years to accumulate the funds you need but at least you will be working towards a worthy goal.
- Adjust your budget, if possible. Obviously the more you are able to save each month, the quicker you will reach your savings goal. Make cuts in your budget everywhere you can. Put the money saved in your savings account.
- Open a savings account. This account should be separate from other savings accounts you have such as an emergency fund or college savings. Earmark this account as "down payment" or "home". Remember that homeownership also means additional expenses such as loan costs, costs of moving, and possibly new furniture and appliances. Save accordingly.
Additional Ways to Save
Here are some good ways to save even more money each month and put it towards your future down payment.
- Slash your expenses. Every expenditure adds up. Look at your budget and make cuts. Get rid of services that you don't need and rarely use. Do you really need hundreds of TV channels? Look for cheaper alternatives to cable. Reduce your phone bill. Get rid of your land line, if possible. Eat at home rather than going out to restaurants. Those $5 lattes every morning compute to $100 a month. Make your own coffee and take it with you in the morning.
- Look for ways to increase your income. Consider a second job or working more overtime, if it's feasible. Sell items you no longer need or want either over the internet or through a garage sale. Money is money… it doesn't matter where it comes from. Put everything you save into your "home" savings account.
- See if your family is able (and willing) to help. Perhaps your parents or other relatives are planning to leave you something "down the road". Find out if they would be willing to help you now with a portion of the down payment you need. You won't know unless you ask.
- Lower your rent. This option might not pertain to everyone's situation but if you are paying high rent and may not purchase a home for a while, you may want to consider moving to a less expensive place in the meantime. If you don't want to move maybe you could get a roommate, if it's possible. That would immediately cut your moving expenses in half.
Watching your savings grow can be wonderful motivation to stay on course with your budget and savings plan. With patience and good money management skills, your dream of homeownership can become a reality sooner than you think. The smart financial decisions you learn to make now will bring great rewards going forward.