So You Decided To Save For a Down Payment?.. But How?
There comes a time in your life where you‘re ready to move out of the simple yet frustrating world of landlords, leases, and security deposits and into your own home.
Now, getting a home of your own isn’t a cheap endeavor.
There are numerous expenses to consider (like mortgage, property taxes, upkeep costs, etc.)
But there’s one cost you have to take care of before you even think of those other costs:
The down payment.
Typically, most people take a about 5 years to save up the down payment for their house.
Why so long?
Well, you’re about to find out.
How Much Should My Down Payment Be?
There isn’t one strict guideline for down payment amounts.
You can theoretically put as little as 3% down on a house. If you’re getting a $200,000 house, that’s only $6,000.
Usually that only happens with excellent credit or through special programs.
However, a good rule of thumb is 20% of the total costs of the house for a few reason:
- Liked by lenders – For some reason, your lender will like you more if you put down 20%.
- Lower fees – Lenders will lower both upfront and ongoing fees if you put down 20%
- Lower payment – Just like a car. The more you put down, the less principal amount you’ll have to pay off each month.
- Lower interest rate – A higher down payment means a smaller mortgage. A smaller mortgage means the creditor lends you less money, which means less of their money is at risk. To reward you, they drop your interest rate a bit. Combine a lower interest rate with a smaller mortgage, and the savings will be immense.
- No private mortgage insurance – Small down payments imply more risk of being unable to pay off the house in full, meaning most creditors will require you to pay for mortgage insurance to offset the risk. At this point, it doesn’t make much financial sense to skimp on your down payment.
- Equity – Putting 20% down means ⅕ of the house is already yours.
By now, you’re probably noticing how disadvantageous it is to put down a tiny payment on your house.
You’ll make up the savings by paying a small fortune in higher mortgage payments, more interest, and mortgage insurance.
So we highly recommend you put a more significant amount of money down on your house.
Now, 20% down on a $200,000 house is $40,000; As you can see, the optimal down payment will be a whole lot of money.
That’ why people take half a decade (and sometimes longer) just to pay the down payment.
That being said, it’s important to follow each of the following steps closely if you’re serious about buying a house.
Make A Budget (And A Goal) ASAP
Budgeting is the foundation for any large financial goals.
In fact, it precedes every other tip in this article.
Without a budget, you won’t be able to find numerous ways to cut expenses and put more aside for your down payment.
In addition to your budget, you need to have a down payment goal involving two things:
- Amount of down payment
- Date to have down payment
Setting a goal with hard targets helps keep you accountable
Along the way, you’ll want to set mini goals as well to stay on track.
It’s generally much easier to reach a big goal when you break it down into small, quickly-achievable goals.
All you have to do is meet each of those small goals and before you know it, you’ll have your entire down payment ready to go.
There are many budgeting apps out there to streamline your budgeting experience, but Mint is one of the best.
Not only can you set detailed budgets, but you can also tell Mint your specific financial goals and it will provide you guidance.
Relentlessly Cut Your Expenses
With a budget in hand, it’s time to hack and slash at your expenses.
The earlier you’re able to do this, the better because you’ll be able to save more money AND you’ll be able to apply the other tips more easily.
To start, take a look at your random/unnecessary spending. Immediately cut out any obvious unnecessary spending, such as expensive bar trips or fancy restaurants.
From there, look at the subscription-based services you pay for.
Chances are, you’re paying for something you don’t even use!
And even for the subscription services you DO use, find ways to cut your payments on those.
For example, you might be paying for Netflix’s top plan in order to access HD streaming.
But do you really need that?
Consider downgrading to a lower level; it’ll only save you a few bucks a month, but use this tactic with your other subscription services (and combine this general advice with you other expense slashing) and you’ll end up with a good chunk of extra change each month.
Finally, see if you can cut down any essential expenses.
This won’t be possible with 100% fixed expenses like rent, but there are some regular expenses that you can trim down:
Once you’ve slashed your expenses to the max, you have a few choices:
- Put the extra money directly towards your down payment
- Pay down debt
- Invest the money
Whatever you do with the extra money, make sure it helps you inch closer to your down payment.
Want more in-depth guidance for tracking and cutting expenses?
Click here to read a comprehensive guide to tracking and reducing your expenses.
Auto Transfer To A Savings Account (Shorter Timeframe)
When you’re saving aside significant amounts of money each month for such a long period of time, temptation can creep in.
To combat this, open a brand new savings account built specifically for saving for a down payment.
Then, set up an auto transfer for each month in an amount that will allow you to reach your goal on time.
That way, you won’t even have to think about your savings until one day your account is down-payment sized.
If you can, try to find a high-yield savings account. The interest won’t make that much of a difference, but 2% interest (a relatively high savings APY) is way better than 0.01% interest!
Think about it: let’s say you’re buying that $200,000 house we mentioned earlier and plan on putting 20% ($40,000) down. Let’s also say that your savings is at $35,000.
You’ll earn $700 a year based on a 2% APY, which is nothing to laugh at!
Not to mention the fact that your interest will compound (aka add on to the total amount in your down payment savings account).
All of this will slightly speed up the down payment savings process.
Savings accounts are good if you have a shorter time frame to save for your down payment since they’re simple and not volatile.
If you don’t plan on getting your house for a very long time, consider the next option instead.
Invest (Longer Timeframe)
Stocks and other investment assets tend to be more volatile than bank accounts, but they also tend to yield better gains.
If your house purchase is way off on the horizon, consider investing your money instead of just dropping it at the bank.
Depending on your portfolio, you’ll reap a nice mix of capital gains and dividends from your efforts.
Don’t do this alone, though; work with a financial advisor. It’s their job to help people like you plan for massive financial goals like home ownership, and they’ll show you exactly how to invest based on your goals.
Pay Off All Your Other Debts
Unnecessary debt steals money you could be putting towards your down payment.
This is especially true if it’s not “positive” debt that does something productive, such as a mortgage.
Focus on eliminating your highest-interest debt first; this is usually credit card debt.
Credit card debt is also a good target because the amount of debt is usually easier to pay off.
Once those credit cards are under control, redirect the savings towards your down payment.
If you have any small loans, try to pay those off too.
However, some cost/benefit analysis might be of benefit here.
Bigger loans can’t be paid off more quickly without putting your entire paycheck towards them; if you do this, you’ll have nothing left to save for your down payment!
It might make sense to maintain your normal payment on these and eliminate smaller, higher-interest debt.
Increase Your Income When Possible
Increasing your income takes more time and effort relative to your return.
Since you have such a significant dollar figure to hit, focus on things you can optimize relatively quickly. (budgeting, slashing expenses, debt elimination, etc.)
But once you’ve done all the immediate things, look for ways to bring in some extra income such as
- Negotiating for a raise
- Landing a higher-paying job
- Small side jobs (like walking dogs)
All of these are quite easy to start and don’t take too much effort.
Also, the benefits of increasing your income will extend beyond the down payment; after all, mortgage payments aren’t cheap either.
Putting in the work now for higher income later will pay off once you’re all settled in (no pun intended).
Save Your Windfalls
It’s very tempting to spend irregular earnings (such as Christmas gifts or money found on the ground) on unnecessary purchases.
But you have a down payment to make, so why not put this money towards that?
To ensure down payment savings success, top off your savings account with this money or use it to get rid of debt.
Are You A Veteran?
If you’re a veteran, your country wants to thank you in the form of housing payment assistance.
The VA offers mortgage loans with 0 down payment, but they aren’t the only option.
There are tons of veteran housing assistance programs at the local, state, and federal level to help you afford the house of your dreams.
Putting down a large down payment (like 20%) is critical to avoid various fees, reduce your monthly payment, and give you a nice amount of equity right off the bat.
However, these down payment amounts are also quite large; you could end up putting down enough money to buy yourself a new car!
Make sure to budget and plan well ahead of time.
Slash your expenses, eliminate costly debt, and boost your income whenever possible.
Now, each part of saving for a down payment isn’t significant in it’s own right; but put them all together, and the process will take a lot less time.
Before you know it, you’ll be ready to get your own house!
As with any large financial goal, find a qualified financial advisor as early in the process as possible; it might cost you time and money, but their whole job is based on your success.
They’ll do a number of things for you:
- Help you solidify your goal
- Help you create your plan
- Identify tax-efficient investment opportunities
- Identify other great investment opportunities based on your individual needs
- Give you other guidance and support on your journey
Oh, and they aren’t as big a time commitment as you think: meeting with your financial advisor on a quarterly basis should be plenty to ensure you’re on track to owning your own home.
Lastly, don’t give these habits up the moment you walk through the front door of your new home because you now have a house to maintain.
That means mortgage payments, constant upkeep, and decorating the place to make it your own.
Maintaining the habits you established on the way towards saving for your down payment will ensure you live happily ever after (at least financially) when you finally settle in to your new home.
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