April 30, 2024
Saving up enough for a substantial down payment may feel like an impossible goal, but in reality, the funds you need are already available to you. Find out how you can re-prioritize and put your earning power to work to achieve this financial milestone.
One of the things that people seem to fear most when it comes to buying a home is saving up for a home loan. For many people, the large numbers involved may seem insurmountable and it can be intimidating to think about how you will come up with the funds you need on your proposed timeline. Fortunately, we’ve got a variety of tips for saving for a down payment that makes it, if not exactly painless, certainly manageable and doable.
You probably already have access to the funds you need for your down payment, or you soon will. While this sounds like positive thinking or affirmation, it’s really simple math for most people. That’s because, in many cases, saving money for your goal is simply a matter of taking a closer look at your current spending habits, your additional earning power, and some extra resources that you can put to work for your home purchase.
As you’re getting geared up to begin thinking about your home purchase, talk to your lender and determine how much house you can potentially afford. Now, find out how much down payment you’ll need in order to finance a home in your price range. Add in closing costs and the cost of moving and make that your savings goal. Look at your timeline and figure out when you’ll want to begin your purchase process. Now divide your overall savings goal by the number of months in your timeline. That number becomes your monthly saving goal.
Next, print out a couple of months worth of bank statements and look at your current spending. Do you see a lot of discretionary spending there? For example, if you’re seeing a certain online retailer repeatedly, you may find that you’re making too many late-night impulse purchases. If you’re seeing a lot of fast food or fine dining restaurants, you may be eating out more than you need to.
Watch for spending that is based more on convenience than need or spending that is easy to cut out. Maybe you can cut out that expensive gym membership and work out at home instead. Maybe you can take your lunch to work instead of ordering in each day. Add up the money you’ll save and commit to putting that much into your down payment savings each month.
Next, look for subscriptions that you can do without, perhaps to streaming services or home delivery of basic necessities. Look at your cable bill and see if you can do without some of the premium services in order to save even more. You may even find that you don’t spend much time watching cable and that you can make do with one or two less expensive streaming providers. Continue to work through your spending and look for places of painless improvement that you can dedicate to the monthly savings goal you’ve already identified.
You’ve already cut painless costs from your budget. Now it’s time to look at some of your more painful cost-cutting measures. Maybe you spend a lot of money going out on the weekends. Can you cut back by at least one evening? Maybe you enjoy buying designer clothes or the latest tech gadgets. Can you do without these for the foreseeable future while you’re working on your down payment?
Next, take a look at big-ticket items you have been planning on that you may be able to forego. Perhaps it’s a luxury vacation you’ve been hoping to book. Maybe it’s going out of town for a girls' weekend with friends or an expensive bachelor party you’ve been invited to. Maybe it’s season tickets to your alma mater’s home football games. While it may seem like a big sacrifice right now, when compared to the long-term financial and emotional gains of a home purchase, it will be worth it.
Maybe you want to make deliveries, offer tutoring services, or walk pets in your current apartment community. Maybe there are more hours available in your current job or there’s some freelance work that you could do through an online portal. Finding a way to make more money, then dedicating all of those funds to your home savings, can supercharge the achievement of your goal and get you there in record time.
Do you have a collection of designer handbags or shoes that you would be willing to part with? Do you have some sports equipment gathering dust in your parents’ garage? Do you have some old cell phones or laptops you’ve replaced but haven’t yet disposed of? You may even have an expensive car you could trade it in for a more modest model, then put the difference toward your savings goal.
Maybe you’ve been maxing out your retirement savings or socking away extra money in your emergency fund. You may want to reduce the amount you’re adding to those goals during the months while you’re saving for your down payment. As soon as you’ve completed your home purchase, you can put that money right back to work developing your other financial objectives.
Depending on the loan product, you may be able to put some gift funds from close family members toward your loan. Alternatively, if you have a wedding or birthday coming up, you may be able to ask for money toward your down payment in lieu of gifts. Talk to your lender about gift funds and find out whether they are an option in your particular situation.
You may be used to putting your bonus toward discretionary spending each year, buying yourself something special or taking a nice vacation. Maybe your annual cost of living raise just gets absorbed into mindless increased spending each month. This year, however, put your bonus, raises, and any other incentives to work by diverting them directly to your down payment savings.
If you’re a first-time homebuyer, you may be eligible for incentives to help with your down payment or closing costs. In other cases, certain states or cities may offer homebuyer incentives for anyone moving to their area. These are often, though not always, income-dependent so check on the various programs and look for one that makes sense for you, your budget, and your purchase timeline.
This depends both on how much you’re planning to put down and on your available income. If saving too aggressively causes you to become overextended and pay some of your bills late, you could end up doing damage to your credit score and undermining your ability to qualify for a loan. Denying yourself everything you enjoy in order to save as much as possible can also make you throw up your hands and give up on homeownership, finding it too painful.
Talk to your lender about the loan options that are right for you. Some government-backed mortgages, like those backed by the Veterans Administration (VA) or the US Department of Agriculture (USDA), offer zero-down options. Others, like the Federal Housing Administration (FHA) loan, offer interest rates as low as 3.5 percent. A conventional mortgage may range from 3 percent to 20 percent or more.
Remember that if you have less than 20 percent equity in your home, you will generally have to pay Private Mortgage Insurance (PMI) until you attain 20 percent equity. At that point, depending on the loan product, you may have to refinance your home in order to cancel PMI. This can be a significant expense, so it may make sense to wait until you have 20 percent saved up in order to avoid it.
While it’s nice to gain interest on your money while you’re saving it, you need to prioritize both security and liquidity. You may have access to high-yield investments, but they may carry a fair amount of risk and the funds may not be available when you need them. Your best bet, then, may be an interest-bearing savings account, which could yield anywhere from 0.7 percent to 1.5 percent. If you have a little more lead time, you may want to consider a six or nine-month certificate of deposit. This may offer you a slightly higher yield of 2 percent to 2.85 percent.
While you may have been concerned about saving for your down payment and the other expenses associated with your home purchase, the sense of accomplishment you will feel on closing day and the long-term wealth-generating power of homeownership will make those financial sacrifices, both large and small, worthwhile. Keep your eye on the prize and keep envisioning the home of your dreams to stay motivated as you save.
