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Simple Steps to Saving for a Down Payment
Whether your dream home just came onto the market or you’re thinking ahead for a purchase down the road, coming up with the money for a down payment can feel daunting. Don’t fret! There are steps you can take now—both large and small—that will add up over time to help you secure the funds you need to make that offer.
Determine how much you need
First things first, set your goal. The answers to these questions will help you determine what you’ll need to budget for the down payment:
- What do homes cost in the area you where want to live?
- How soon are you looking to buy?
- Do you qualify for buyer-assistance programs in your area? Where have interest rates been going (up or down) lately?
Don’t forget about closing costs when calculating how much you’ll need!
Start a high-yield savings account
It’s difficult to keep track of how much you’re saving if you’re putting all your money in the same account you pay for living expenses with. Your down payment fund deserves its own savings account.
Look for high-yield savings account options at your current bank or find a new bank that offers one. Many banks today offer a 3-5% annual yield that will compound quickly.
Eliminate unnecessary expenses
No, you don’t need to stop eating avocado toast or give up your hobbies. Even simple changes can quickly add up.
- Go thrifting instead of buying new clothes.
- Get your library card rather than buying new books.
- Cancel subscriptions to publications or services you rarely use.
- Prepare meals at home a few times a week instead of dining out.
Though cutting back can sometimes feel like an inconvenience, these adjustments are temporary and don’t have to change how you live too drastically. Even while you’re re-prioritizing your spending, you can still simultaneously save for things like travel, and all the provisional adjustments will feel worth it when you’re enjoying your new home.
Don’t dip into emergency funds
Though it can be tempting to look at your retirement account balances or emergency savings account and daydream about barbeques in your new back yard, don’t give in. The tax implications of cashing out a 401K or IRA almost always outweigh the benefits of the quick money, and many retirement accounts require paying them back relatively quickly, likely before you’ll have built equity in your home. And your emergency fund is there for just that: emergencies. Life can be unpredictable and having at least six months’ living expenses stored away offers peace of mind is priceless.
Automate your savings
If you haven’t already, arrange to have your paycheck automatically deposited into your bank account, and then designate a percentage of it to go directly into savings rather than checking. This helps ensure that you’re putting the cash away before you use it on other expenses. By depositing directly into your savings account you’re less likely to think about it when making a purchase.
Other ways to automate savings include taking advantage of programs that will round up any purchases you make from checking and put the difference directly into your savings account. Check to see if your bank offers this or look into available applications in your app store. You can also use a credit card that offers cash back on a percentage of what you spend and save those rewards in your separate savings account. Just be sure to pay the bill completely each month!
Take advantage of windfalls
If you get a raise, bonus, or inheritance, put the extra money right into your high-yield savings account and stick to the budget you had before the windfall. You won’t feel a difference in your lifestyle, but even an incremental increase will help chip away at your goal.
Ask for help
Weddings, graduations, new babies, and other major life events are great opportunities to ask for cash in lieu of gifts. Be sure to document any gifts appropriately, and as long as it is a gift and not a loan, money from family and friends can help put you in a home you’ll all be able to enjoy together soon.
Buying a home is likely to be the largest financial transaction you’ll make in your life, and saving enough for a down payment can feel overwhelming. But with some dedication and smart money choices, you could be ready sooner than you think. Good luck, and happy saving!
To get an estimate of the value of your home, try Windermere’s free Home Worth Calculator at the link below:
To connect with an experienced Windermere agent today, click the button below:
Making a Down Payment on a Home
Imagine the process of financing a home purchase as a relay race. From start to finish, the baton must be passed several times between interconnected transactions. The down payment plays an important role in the relay race and will help you cross the finish line, but how much money do you put down? And when do you make the down payment? Understanding its characteristics will help you see where it fits in the home buying process.
What is a down payment?
The down payment is a large payment made upfront to help fund a home purchase. Unlike the financing obtained through a mortgage loan, the down payment comes out of the buyer’s pocket, not from a lender.
For example, let’s say the house you want to buy is priced at $500,000. If you put $25,000 down, or five percent of the purchase price, that would leave $475,000 you’d need to pay for with a mortgage. If you put down $100,000, or 20 percent, that would leave a $400,000 mortgage principal. In general, a higher down payment equates to a lower interest rate since that financial structure is viewed as less risky by lenders. It also means your monthly payments will be lower since your loan balance is smaller.
However, making a large down payment isn’t feasible for everyone. In fact, according to the National Association of REALTORS® Profile of Home Buyers and Sellers1, the typical down payment was seven percent for first-time home buyers and 17 percent for repeat buyers in 2021. If you’re not able to put down 20 percent of the home’s purchase price, your lender will typically require that you obtain Private Mortgage Insurance (PMI), which protects them against the possibility of a mortgage default. The benefit of PMI is that it creates a pathway to homeownership by allowing you to move in and start building equity right away.
Different loan products have different down payment requirements. Conventional loans have a minimum down payment requirement of three percent, while government-backed loan products like VA loans or USDA loans may allow you to purchase a home with no money down if you qualify.
Down Payment: Home Monthly Payment Calculator
As you prepare to buy a house, it’s helpful to see what you can afford. Your down payment will have a direct impact on your loan terms and your monthly mortgage payment. Use our Home Monthly Payment Calculator to experiment with different down payments, principal amounts, interest rates, taxes, and more for any listing price.
Image Source: Getty Images – Image Credit: Paperkites
How to Save for a Down Payment
Though your lender will need to verify that you have the funds available to make your down payment early on in the mortgage approval process, the down payment is officially due at closing. Saving up for such a payment may seem like a daunting task, but with the right planning, you’ll make steady progress. Having a strategy in place for compiling your down payment is a telltale sign that you’re ready to buy a home. Here are some methods of generating savings to consider:
- Consider downsizing to reduce your living expenses and increase your savings over time.
- Reduce your debt before applying for a mortgage to give yourself a better shot at favorable mortgage terms—i.e., a lower down payment requirement and reduced interest rates.
- Explore down payment assistance programs to see if you qualify.
- Ask family members for support.
If you’re in the process of selling your current home while looking for a new one, know that you can use the proceeds of the home sale to help finance your new home purchase.
For more information on financing a home purchase, helpful tips on the buying process from start to finish, and more, visit our Home Buying Guide.
1. National Association of REALTORS® (2021) Profile of Home Buyers and Sellers
Featured Image Source: Getty Images – Image Credit: ridvan_celik
