Congratulations - you're officially a grown up if you've decided to buy a home! Now what? With home prices and interest rates rising in recent months, the price tag and implied down payment can seem like a steep hill to climb. We’ll break the problem down into two steps, and really dig into the process of saving for a new home.
- How much to save: Start by opening a separate account specifically for your down payment funds. Calculate a range of down payment options by multiplying your desired home price by 5%, 10%, and 20%. Add another 2%–5% percent of the home price for closing costs. Take a look at your monthly spending and decide how much you can afford to save each month, then back into how many months you need to save your target amount. Schedule regular deductions from your paycheck to be deposited into your account and make sure that you’re setting aside enough money each month to reach your goal in time. Read on for more details on how to execute your plan of buying a home.
- How to save: Saving for a down payment can seem daunting, especially for first-time home buyers. Breaking the process down into smaller, actionable money moves, however, can help make it more manageable. To get started, research loan options, create a budget, and set a timeline. Establish an Down Payment fund, then simplify your path to homeownership by automating your savings so that you can stick to your plan.
Step 1: Determine how much to save for a down payment
When it comes to saving for a down payment on a home, there are several factors to consider. Credit score and income are two variables that help determine your down payment. The amount of the down payment is typically expressed as a percentage of the home price and can range from 3% to 20%, depending on the type of loan you choose. Conventional loans usually require a minimum 3% down payment, while jumbo loans require at least 10%. Many people aim to save 20% because that amount might help you get a better interest rate and avoid mortgage insurance.
Many homebuyers factor interest rate into their planning to make sure that they save enough to cover their expected monthly payment. FICO score is a variable that determines your interest rate. There are many banks that offer credit insight tools that can help you understand your FICO score and general creditworthiness.
Pro Tip - Down payment calculators can help you figure out the math.
Step 2: Figure Out How To Save Money For A House
Once the goal amount is determined, creating a budget and setting aside money for savings is essential. Automating deposits into a high-yield deposit, savings or money market account can help ensure that funds are consistently saved each month. Here’s what you should look for in an account:
- High APYs - make sure your money works hard for you
- No monthly fees - there’s no need to eat away at your down payment
- Joint Accounts - save and manage expenses together while maximizing FDIC coverage
It’s worth noting that investing in the stock market should not be considered as an option for those looking to purchase a home in four years or less due to its volatility.
Build A Better Budget
Creating a budget is essential for saving money for a down payment. It can be difficult to know where to start, but the first step is to calculate your monthly income and expenses. This will give you an idea of how much money you have coming in and going out each month. Check and see if your bank has cash flow insight tools that give you visibility into your financials. Once you have this information, look for areas where you can cut back on nonessential spending. Set a budget for each category and put away a certain amount each month for your down payment.
There are many budgeting methods to choose from, so find the one that works best for you. Whether it’s the 50/30/20 rule or the envelope system, having a plan in place will help you stay on track with your savings goals. Listing your monthly expenses, and then cutting back on extras like clothing, shopping and entertainment can also help you stick to your budget and save more. With some discipline and dedication, building a nest egg is possible.
Cut unnecessary spending.
Cutting unnecessary spending is an important step to take when saving for a down payment. To start, you can begin by eating out less and buying generic groceries. Cut out any subscriptions that you don't need. Shopping for used products is another great way to save money. You can also replace vacations with staycations and use free at-home workouts instead of gym memberships.
Relocating to a more affordable apartment or neighborhood, getting a roommate, and biking to work are other creative ways to reduce your expenses. For those of you in big cities - take public transportation and dramatically cut your Taxi/uber expenses.
It may be difficult at first but it will be worth it in the end when you reach your savings goal. Make sure to track your progress along the way so that you can see how far you’ve come and how much closer you are to achieving your goal. With some dedication and hard work, you’ll be able to make a significant dent on your expenses.
Pro Tip - Manage your savings and expenses in an account that lets you easily tag transactions so that you can budget your money more effectively.
Chop Down Your Debt
Paying down debt is an important step to take before applying for a mortgage loan. Lenders consider your debt-to-income ratio when considering you as a candidate, and the more debt you have, the less favorable you are. Creating a plan to tackle your debt can help improve your credit score (e.,g., FICO) and qualify you for a lower mortgage interest rate. Paying down debt can also free up savings in the future, allowing more money to be put into a savings account or used for updating and decorating a new home after purchase.
There are many strategies that can be used to reduce your debt. Start by making a list of all of your debts and prioritize them based on interest rates, balances, and other factors. Make sure to make minimum payments on all of your debts while focusing extra payments on the highest priority ones first. You may also want to consider consolidating multiple debts into one loan with a lower interest rate or transferring high-interest credit card balances onto cards with 0% introductory fees.
Keep down payment savings in the right account
High-yield savings and high-yield checking accounts are a great option for short- to mid-term savers, offering easy access, total liquidity and FDIC insurance. Money market accounts are also insured and offered by banks and credit unions, but require some shopping to find decent returns. Certificates of deposit offer slightly higher rates than savings accounts or money markets, but the money is generally inaccessible for the term unless a penalty is paid.
Try not to mingle your down payment funds with the rest of your money because this will reduce the likelihood that you dip into the savings for an unnecessary expense. If you can, look for a high-yield account that lets you label, nest, and protect funds within your account.
Automate Your Savings
Nothing harms your budget more than an unexpected expense or splurge. By setting up an automatic withdrawal from your primary account into a separate savings account, you can avoid impulse shopping and make sure that you are always putting away money. Make sure that you schedule the withdrawal on your payday or when you know you’ll have enough money to avoid overdraft fees.
HM Bradley, Inc. (HMBradley) is a financial technology company, not a bank. The information above is for informational purposes only and is not legal, financial, or tax advice, and it may not be suitable for your individual needs; speak to a licensed financial advisor who can help you tailor a plan for your specific needs.