Purchasing a home is one of life’s greatest milestones for most Americans and the largest purchase they’ll ever make.
Mortgages typically entail putting money down in addition to other costs such as ongoing maintenance, repairs, closing costs, and property taxes.
It’s a lot to take on, which is why stacking up your savings before you become a homeowner is a wise move. While that may seem like a long time, fret not, as there are a few ways to speed up the process.
When you’re already financially stretched thin with recurring expenses ranging from auto loans, transportation costs, utilities, rent, childcare, and student loans, amassing thousands of dollars for a down payment is no easy feat but is possible.
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If your goal is to become a homeowner in the foreseeable future, then read on to discover the best tips on how to save money for a house and reach your savings goal.
Why Do I Need A House Down Payment
Let’s start with the basics. If you’re looking to buy a house, a down payment is a must. It refers to the cash you bring to the closing table upon purchasing a home.
Although you may receive financing from your local bank in the form of a mortgage loan, a percentage of the total cost must come from you.
Here’s why. The down payment serves as a type of insurance for your lender.
When you hand over your funds, you have made a financial commitment, and you’re more likely to make good on your mortgage loan payments every month for years down the road.
By saving up for a down payment, you put your mind at ease, and you prove yourself to a lender. A sizeable down payment cuts down your monthly payment, allowing you to opt for a shorter mortgage loan timeframe. You’ll clear the debt sooner rather than later.
Check out this free home buying guide and financial dashboard to see how buying a house will affect your money goals.
How Much Should You Save For A Down Payment?
It’s a no-brainer that accruing debt can be stressful, to say the least. That’s because credit card debt, car loans, and student loans can tie up your income, leaving you with limited funds for the things you desire, like becoming a homeowner.
The good news is, you don’t need a million dollars or thereabout to put yourself on the right path to buying a house.
You’ll need to work through the process below to hit your magic number. I’ll use a fictional family, the Smiths, to walk you through the steps.
1. Determine the amount you can afford every month
As a rule of thumb, don’t spend more than 25% of your monthly income on your mortgage payment. Tying up too much of your funds in your monthly payment will leave you unprepared to embrace opportunities or face emergencies.
For the Smiths, 25% of their monthly earnings translate to $2,000 (on a $96,000/year income). Bear in mind that this figure should include homeowner association fees, property tax, escrow, and insurance.
To do the math, pen down the amount of cash you and your spouse (if applicable) bring home monthly. Then, multiply this figure by 25% to discover how much you can afford as a monthly mortgage payment.
2. Use your monthly mortgage installment to compute the total amount
Let’s play around with a Mortgage Calculator to discover what price range the Smiths should stick to. The calculator you opt for should have a 15-year fixed rate.
If the Smiths bought a $200,000 house, their estimated monthly payment (with a 20% downpayment) for a 15-year mortgage at a 4.5% interest rate is $1,421. For a 30-year mortgage, their estimated monthly payment is only $1,008 but they’ll end up paying far more in interest in the long run.
Opting for a 15-year mortgage is guaranteed to save you tens of thousands of dollars instead of the conventional 30-year alternative.
That’s not the only way to save thousands on your mortgage. Later on once you’ve bought your home, it may not be a bad idea to try to pay it off early.
Take the time to crunch the numbers on the calculator by inputting different numbers into the down payment section and home value section to hit your preferred monthly installment. Take note of your options and discuss them with your spouse or someone you trust.
If the monthly payment for a 15-year mortgage doesn’t work, don’t worry. You can still get a 30-year mortgage and pay it off like a 15-year once your financial circumstance improves.
3. Aim for anywhere between 10% and 20% of your down payment
If you’ve yet to do so, hone in on the percentage downpayment that works best for you and your family. You’ll want to put down 20% to cut down your interest rate, avoid private mortgage insurance (PMI) and pave the way for a 15-year mortgage.
To do the math, multiply your total mortgage amount by the percentage you intend to put down towards becoming a homeowner. With your savings target in tow, it’s time to start putting funds aside to reach your financial goals.
For the Smiths, if they want to buy a $200,000 home, this means they’ll need to save $40,000 in order to meet their 20% downpayment goal.
Hidden Fees and Other Things to Consider When Saving Money for a Home
It’s worth noting that lenders are not your friends. Their goal is to maximize their interest which is why, besides a down payment, banks expect you to pay for additional costs that might feel hidden if you’re not aware of them beforehand.
To avoid unwarranted surprises down the road, let’s uncover them:
Private Mortgage Insurance (PMI)
Private mortgage insurance is a fee tacked onto your monthly installment if you put down less than 20% of the total amount. The PMI can up your mortgage by $50 per $100,000 you spend on a home.
Inspection and Appraisal Costs
For the lender to sign off on your mortgage, the inspection and appraisal of your future home is a requirement. Each fee usually amounts to $300.
There’s no denying that a boatload of work goes into signing on the dotted line. Furthermore, unless the seller agrees to pick up the tab, you can expect to incur anywhere between 2% and 5% of the total mortgage value.
How to Save Money for a House
Now that you know how much money you need to buy a home, it’s time to start saving. Use these strategies to start saving for your future down payment.
1. Come Up With a Foolproof Budget
The journey to save money for a house starts with budgeting. I recommend creating a zero-based budget so that you plan out where every dollar goes.
After all, if you can’t account for the amount of cash you spend monthly, it’s nearly impossible to channel money toward a down payment.
Collect your credit card and bank statements for the last year and check where most of your money goes. Take note of the amount you spend on utilities, student loans, car loans, and other necessities.
Then, factor in your monthly expenses on eateries, clothes, shoes, entertainment, and other nonessentials.
A budgeting app can make the accounting process easier by automating it to save you the hassle of manual calculations. Once you categorize your expenditure, look for areas where you can cut back, for instance, spending less on entertainment.
Come up with a realistic and definite budget for every category and stick to it. Ensure you budget a particular amount to put away every month for your down payment.
To stay on track, your savings should be non-optional.
2. Consider Downsizing
A quick way to channel funds towards becoming a homeowner is by downsizing. It’s the process of lowering your expenses and living well below your means as you save.
You reduce the amount you shell out on unnecessary expenses when you downsize and channel the extra funds into a high yield savings account.
Moving to a more affordable area, renting a smaller apartment, or selling an extra vehicle you have are a few excellent ways to downsize.
A multitude of people downsize to save up for a large purchase. In doing so, you might discover you enjoy a simple life.
3. Eliminate Bad Habits
Cutting out or reducing bad habits can help you put away hundreds or thousands of dollars annually. Eliminating these self-destructing habits and channeling the money to your down payment fund can make a significant difference.
If you’re susceptible to impulse shopping online or in-person, consider cutting down on the amount you spend. You can also unsubscribe from marketing emails to avoid seeing irresistible deals in your inbox.
Besides avoiding piles of clutter in your home, you’ll be pleasantly surprised at how much you save in the long run.
It’s no secret that takeout and trying out new restaurants can be the pick-me-up you need. However, making it a habit can dent your wallet.
Rather than eat out or order food most of the week, you can try cooking a few meals at home to limit your expenses.
4. Request a Raise
If you find yourself living paycheck to paycheck despite your efforts, it might be time to ask for a raise and get paid what you’re worth. To boost your likelihood of success, here are a few pointers to consider.
Ensure the Time Is Right
Knowing when to ask your manager to review your earnings is ideal for enhancing your chances of things working in your favor. That means avoiding asking during a hectic project when the company is experiencing losses or retrenchment.
Instead, request a raise during your annual performance review but after the completion of a large project.
Avoid walking into a salary discussion unprepared. Instead, be armed with specific results and performance data from the projects you’ve worked on to justify your raise and prove to your manager why you’re a major asset to the company.
Ooze Confidence and Gratitude
Your demeanor during your salary negotiation is equally important as the words that come out of your mouth. Exude confidence in what you say while showing immense enthusiasm and gratitude.
Let your manager know that you see a future with the company and are ready to take on more responsibilities.
5. Explore Your Options
Switching jobs and landing higher-paying opportunities can help you save money for your down payment. Skim through salary comparison and job posting sites to see your potential earnings.
If you discover you’re being paid below average, you can use your findings to leverage higher earnings or request a promotion at work. If you’re not passionate about your job or a raise is out of the question, you can search for more lucrative roles that align with your qualifications.
6. Skip the Travels
Exploring new places can be an unforgettable experience, leaving you with plenty of memories to look back on. On the flip side, it can be costly, with families spending thousands of dollars.
Consider stashing away the funds for a down payment and cut down to a staycation in your city. Let’s explore a few ideas to get the ball rolling.
Tour Local Historical Sites
You don’t need to book a flight to Italy or Paris to experience the culture. The US is littered with rich historical sites.
For that dose of culture you yearn for, visit a nature preserve, museum, or historical landscape, at a fraction of the cost.
Plan a Spa Day at Home
If you’re daydreaming of a trip to the spa for some R&R, you can replicate the experience from the comfort of your home with an array of scented candles, a bubble bath, burning sage, and a home facial kit.
As you revel in the experience, you can order a beauty subscription box that will only set you back anywhere between $10 and $20.
Check Out a local Art or Cooking Class
For a boatload of travelers, it’s no secret that trying something new is one of the most fulfilling aspects of a holiday. You can replicate the experience by crafting a piece of artwork at your local recreational center or enrolling in a local cooking class without spending thousands of dollars.
7. Get a Side Hustle
With the competitive and growing world of gigs in today’s digital era, there are countless opportunities to earn extra bucks online, depending on your skill set. Let’s discuss a few ideas to consider.
Freelancing refers to the type of work that allows you to complete various gigs for clients in the comfort of your home. Contracting your expertise as a musician, copywriter, photographer, and artist can put hundreds or thousands of dollars in your pocket.
The best part is that you can set your work schedule.
Work for Ridesharing Companies
Lyft, Uber, and other rideshare companies provide side hustle as they allow you to set your preferred working hours.
If you’re employed full-time, you can supplement your income by driving at night and on weekends. Additionally, when there’s a surge in the prices of rides, you earn more cash per mile.
Pet Walking And Sitting
Although everyone loves their furry friends, life gets in the way, and some pet owners lack time to walk their dogs daily. Pet sitting and dog walking can be a fun and lucrative side hustle if you’re an animal lover.
This is actually how I earned hundreds of dollars every month when I first became a stay-at-home mom.
Test Websites and Apps
Businesses require everyday users to test out websites and apps to ensure their user-friendly. When you sign up with testing companies such as User Testing and Test Birds, you can earn extra bucks to channel towards saving up for a home.
8. Reduce Your Debt
If you’re determined to become a homeowner, channeling extra income toward clearing your debt is seemingly counterintuitive. Nevertheless, one of the first things that lenders check for before giving you a mortgage is your debt-to-income ratio (DTI).
The more debt you’ve accrued, the less likely you are to qualify for financing. That could mean higher interest rates and down payment requirements.
Before hastily applying for a mortgage, take the time to reduce your debt or clear it if possible. That means looking into the amount you owe on your loans, such as auto loans, credit cards, and student loans, and formulating a foolproof plan to tackle it and be debt-free.
9. Rent Any Extra Space You Have
If you have extra garage space or a room in your home, you can consider renting it out on VRBO as a supplement to your income.
Doing so also gives you control over who uses your space and when. For example, you can approve guests and dates ahead of time and only rent out the space at your convenience.
You can filter out the dates when the rental is unavailable when you have a family member or friend visiting. Finally, if you reside in a heavily populated area, the rental can be a great source of income on the weekends.
10. Automated Savings
If you’re vulnerable to impulse purchases, consider setting up automated savings to keep you on track. Once you decide the amount you want to save for a down payment on a mortgage, you can reach out to your bank and authorize automated withdrawals from your transactional account into your savings account.
The bank will automatically debit money from your account every month and transfer it into a separate one. That comes in handy for those who find money management a challenge.
When funds are less accessible, you can fight off the temptation of impulse buying.
Remember to schedule your withdrawal when you know you’ll have sufficient funds or on your payday. That’s because overdraft fees can strain your down payment fund.
To Wrap Up
Buying a house can feel intimidating and overwhelming, so some people shy away from it, understandably so. Yet, it’s the biggest purchase you’ll ever make, which is why you need to be mindful and smart.
With strategic planning and heeding the advice in this guide, you’ll become a homeowner sooner than you realize.
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