Tips for Saving for a Down Payment on a House
Increasing rent costs have many potential homebuyers considering thepurchase of a home. But in the current market, it can feel like this goal may never be attainable as home prices and mortgage interest rates increase.
One of the best strategies to obtain the best interest-rate offer possible is to have a significant down payment. But how is one supposed to save up money when inflation is increasing and home prices are so expensive?
Here are some practical tips to help you put some money away for a significant down payment in a smaller amount of time than you might expect.
Tips for saving up for a down payment
Saving tens of thousands of dollars to put some of your own money into your home purchase can feel overwhelming but it can be much simpler than many people realize. Especially if you have an organized plan of how you will save your money. It is also important to know how much you need to save away and how much you can actually afford to save.
Knowing how much money to save starts with thinking about the numbers 15 and 25. To avoid paying an exorbitant amount of interest it is a good idea for many home buyers to try and make it their goal to obtain a 15-year fixed
rate mortgage that is no more than 25% of your monthly take-home income.
This 25% housing payment should include paying the principal, interest, property taxes, homeowners insurance, any required private mortgage insurance, and homeowners association fees. The first five items will more than likely be wrapped into your monthly mortgage payment, but you want to make sure you also add those homeowner association fees to your monthly housing costs if you purchase a home that has an HOA.
These are high goals you could also opt for a goal of a 30-year fixed rate
mortgage (it just depends on how much interest you are okay paying to the bank over the life of your loan) and 1/3 of your take-home pay being allotted for housing costs. Both of these models allow you to live comfortably instead of paycheck to paycheck after purchasing a home.
Five steps to help save for a down payment
Now that you have a goal of what type of mortgage you are trying to attain and how much money you are able to make in monthly payments it is time to start saving that significant down payment to get the best loan terms. Here are
five steps to get started on the path to saving for that down payment.
Start with a clear savings goal
It is easiest to stay on track with your goals when you know what the actual endpoint goal is. For a down payment, this is knowing exactly the dollar amount that you want and need to save. To arrive at this number there are four questions you can ask yourself. They include how much should you spend on a hou
se. How much should you save for a down payment? How long will it take to save that amount of money? And where can you safely store the money you are saving?
Everyone should make it their goal to spend no more than one quarter to one third of their monthly take home on total housing costs. This will look different for every homebuyer so you want to add up your total income and then do the math on what the numbers are and find what you most comfortably will be willing to pay but make sure that you are spending absolutely no more than 1/3 of your current income on housing. This allows you to have plenty of inco
me for other mandatory life expenses like groceries, your car, and all of the expenses that come with owning a home and having a car. Then you want to be able to have a little bit left over to do some fun things and enjoy life.
Try using a mortgage calculator to help you discover how much mortgage you might qualify for within your current healthy monthly payment.
It is recommended that you save up 20% of the home purchase price for a down payment to avoid having to pay private mortgage insurance which is an
extra fee on your monthly mortgage bill. If 20% is unattainable without decades of saving then try and shoot for 10% so that you are not paying extra interest and fees.
How long it takes a person to save a down payment is really up to the individual and how diligent they want to be at putting the money they can set aside away for this purpose. You want to make sure you're not dragging it out too long as it will keep you from other savings goals and you could end up paying even higher prices as time goes on for a home.
The best place to keep the money you are saving for a down payment is in a savings account to help you earn a little bit of interest as you save. Instea
d of just tucking it away in your sock drawer why not let the bank help you out in getting closer to your goal just a little bit faster?
Next, streamline your budget
The best place to find money to save for a down payment is in your current monthly income. You want to stretch those budgeting muscles to get you to your homeownership goals. The easiest way to find some money is to look where you already have money coming in. It may seem like you don't have anything extra to put aside but you would be surprised when you start fine-tuning
Look for items that you spend money on that could be paused or eliminated from your monthly spending. This could be items like a gym membership, going out to eat, purchasing clothing, cable, and just other forms of generic spending on things that are not necessities. In some cases, you might be surprised to find that you could save up almost $10,000 or more in just a couple of years.
Consider putting a pause on retirement savings (just for now)
Retirement savings are very important and if you already have retirement
savings it could feel weird to put a pause on this. It is a very smart place to put some extra money especially while you are still in your 20s and 30s. If you are planning on purchasing your house in the next few years it is OK to hold off on putting money into your retirement saving to help you find the money for a down payment.
It is OK to put a short temporary pause on this savings and get right back to it once you have purchased your home. You only want to take a one or two-year pause on this not a five-year pause. If you are putting for example about $500 a month into your 401(k) you could instead put this towards your down pa
yment and have $12,000 in just two years. You want to make sure that you are not borrowing from or cashing out your retirement accounts however saving up for your payment. This will hit you with penalties that are not worth it.
Find small ways to increase your income
Having a temporary side hustle is a good way to pick up a little bit of extra money that you can stash away for your down payment. There are several small jobs out there that you could pick up outside of your main career to help you bring in a little extra cash. It could be something like walking dogs throug
h an app like Rover or offering to run errands for people or maybe even driving for Uber.
Temporarily slash that extra spending even more
Depending upon how serious you are about saving for your down payment and how quickly you want to do it you could get super disciplined with slashing your budget. Here are some ideas of items you could temporarily cut out just for a short season until you save that money for a down payment.
- Take the option of skipping your vacation for this year
- Sell off some items in your home that are not being used through Facebook or another online marketplace or hold a garage sale
- Instead of spending that birthday and Christmas gift money on yourself or celebrating that annual bonus at work with a fancy dinner put it away for your down payment.
How much you put toward your down payment and how quickly you are able to reach that amount of money really is up to you and your personal goals. One thing is for sure the larger the down payment you have the better loan terms he will be able to attain. This can make is a significant difference in the affordability of a home.
For more information on purchasing a home in Granbury and surrounding areas please contact us anytime.
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