Inside: Trying to save for a down payment on a house may seem intimidating. We have a plan and savings ideas to get the downpayment you need.
Have you been dreaming of buying a home? You aren’t alone. As millennials enter their 30s, many are seeking to buy their first home. At the same time, rising rents and the burden of student debt have left many struggling to figure out how to save for a down payment on a house.
Once you figure out how much you need to save, you can then take the steps necessary to reach your goal of buying a home.
Prepare to save for a down payment on a house
Determine how much you need to save
The first step when trying to save for a down payment on a house is knowing approximately how much you need to save. Look at your income and determine what you can afford, taking into account mortgage payment, property taxes, and insurance. Remember that you will want your housing payment to be no more than about 28% of your income. Using a home affordability calculator can help you with this estimate.
If homes in your area are particularly expensive or you can’t afford a larger mortgage, you will want to save for an even larger down payment.
If you are willing to pay mortgage insurance (which I don’t recommend), then you may be able to find a loan where the required down payment can be as low as 3.5%. Otherwise, you should aim for a 20% down payment. So, if you are looking at houses that are about $250,000, a 20% down payment would mean your goal is to save $50,000. If you are applying for an FHA loan with a 3.5% down payment, that would come to $8,750 but your mortgage payment would have PMI added on as well.
If the amount you need to save seems a bit fuzzy, that’s because it is. Home prices go up and down, interest rates fluctuate, and timelines vary. Reality may also set in as, after doing the math, you realize there is you may not be able to afford your dream home anytime soon and will need to scale back your vision or extend your timeline.
Figure out how soon you want to buy
Once you feel fairly confident about how much you need to save, you need to figure out when you want to buy a house. The timeline will determine how aggressively you need to save. If you want to buy a house in 3 months, you need to have your money saved already. If you are thinking 2 years or more, that gives you more time and flexibility in your saving strategy.
Take your estimated down payment, subtract any money already saved, then divide by the number of months until you think you want to buy a house. That number is how much you need to save each month on average.
Open a separate savings account
When saving, for most people it works best to keep your savings in separate buckets or accounts. Open a new savings account specifically for your down payment. Your bank may even allow creating sub-accounts from your regular savings account.
Having a separate savings account for your down payment helps take away the temptation of dipping into the savings for other purposes. It also makes it easier to track savings your progress.
Create a budget
It might seem like you can just start shoveling money into your new savings account. But, you don’t want to go into debt by saving. Set up a budget so you know how much you have coming in and going out.
Where is your wiggle room? If you can put money into your savings account each month without making any cuts elsewhere, great! Otherwise, you will need to examine your budget to figure out where to get the money.
Ways to save for a down payment on a house
Lower your rent
Lowering your current living expenses could be a big win for your savings. Can you take on a roommate or move to a less expensive apartment? If you are renting a house, you might even be able to negotiate a rent reduction with the landlord in exchange for some work. Maybe the landlord would like you to take over the yard work, do some painting, or other work in exchange for paying less rent. Once negotiated, get the agreement in writing.
Lower your insurance bill
Look over your current car insurance rates. Are you a good driver? Do you have too much coverage or too low of a deductible? Gather your information and then talk to a couple different insurance companies as well as your current one and see if you can lower the cost of your insurance.
Ditch the cable
I get it, watching tv is a great way to unwind. But paying for cable is expensive, often close to $100 a month or more. Unplug the cable box, hook up an antenna and see what happens. Between free digital channels, Hulu, and episodes posted on the network websites, you’ll have plenty of shows to choose from without the hefty bill.
Save money on food
Food is a huge budget buster in many households, and it doesn’t need to be that way. How much do you spend buying lunch at work or going out for dinner? What about having a drink after work? Are most of the items in your grocery cart frozen dinners?
You don’t need to stop doing all that, but if you really want to save money, you will need to cut back. Try packing a lunch most days. That right there is likely $2 vs. $10+ each day, or a savings of $8 or more each day you pack a lunch.
If you cook at home more rather than going out, you’ll see even greater savings especially as dinner prices at restaurants are even steeper than lunch menus.
Related post: How to Stick to a Budget at the Grocery Store
Save your windfalls
There are times you may come into a bit of extra money. If you get a raise at work, save the extra income. Continue living on the same income you were before and have the extra amount automatically deposited to your savings account. You won’t notice the difference, but your savings will.
Tax refunds, work bonuses and gifts of money are all other windfalls that can bolster your savings. Rather than splurging on an expensive vacation or new gadget, put the money towards your savings goal. It may seem rough, but you can make these small sacrifices in order to save for a down payment on a house.
Related post: 9 Smart Ways to Use Your Tax Refund Money
How much would you save by taking public transportation, walking, or biking to work? The cost of gas and parking can add up to a sizeable chunk of money. If you can save a bit by taking the bus into work, you’ll not only be saving money but help keep the air cleaner as well. Also, check with your employer to see if they offer discounts on bus passes or other transportation incentives.
Automate your savings
Once you free up room for savings in your budget, you will want to automate your savings as much as possible. Auto-deposit part of your paycheck directly to your savings account or automatically redirect money from checking to savings. You won’t have to think about it and your savings will grow without you worrying or tempted to spend the money.
Get a side hustle
Earning a bit more money through an extra job can make a huge difference when trying to save for a down payment on a house. Are you able to tutor or take on some contract clients? You can even find occasional odd jobs on Craigslist.
Saving for a down payment can seem daunting, but it is doable. Once you’ve reached your goal, you can be proud of yourself for working so hard.
Have you bought a house? How much of a down payment did you have?