How To Save For a Down Payment On a House

How To Save For A Down Payment On A House

One of the biggest achievements that you can accomplish is to purchase your own home. Most people really look forward to this great accomplishment. There is something about no longer having to rent that really gives you a rush. You suddenly are so overwhelmed with many different emotions. You go from being thoroughly excited but completely scared of the new reality. Looking for a home is the fun part. You get to go through the mortgage process with your bank to see how much you will be approved. Depending on what you do for a living, coming up with the down-payment for the house may or may not be an easy thing. The more expensive the house the larger the down payment. Let’s talk about how to make sure you’re ready to start saving for a down payment in the first place.

Before you attempt to save a single penny for a down payment, you should be completely debt-free and have a fully -funded emergency fund of 3-6 months of expenses. Being debt free is an amazing feeling but with home purchase you are about to embark on a totally different journey. Having a mortgage will be a very big financial decision so you must go into it as best prepared as possible.

Saving for a down payment on a house can be overwhelming, but when you have a clear concise plan, it does be easier than you imagine

1.    Down Payment Savings Goal- If you can’t pay cash like most of the world, you would have to put at least 10% down on your new home. 20% is even better. That way you can avoid private mortgage insurance (PMI). This is an extra cost that your lender tacks on to your monthly payment just in case you don’t make payments on your loan.

Always remember to buy a house that you can actually afford. Most times the bank may approve you for more than you are actually comfortable with paying back. Look for a house that is within your budget, where paying your mortgage and all other house bills are within reach and feasible. Stick with a 15-year fixed rate mortgage that’s no more than 25% of your monthly take home pay.

       2.    Now that you’ve started saving for your down payment, where is the best place to put the money I’m saving for a down payment?

• In most cases, a down payment is not an investment. Unless you plan to save for five years or more for a down payment, you just need to park the money somewhere. A money market savings account will get the job done. You won’t make any money on your money, but you won’t lose it either. Look into a high-yield savings or money market account for holding the down payment funds. You generally get a bit more interest in these accounts than you do in a regular savings account.
• Check out a certificate of deposit, called a CD. You have less flexibility and liquidity with these accounts, but the principal protection and yields can be attractive when compared to a typical savings account

So, let’s say you have 24 months before you want to buy a home, and you decide to save $40,000 to cover your down payment plus closing costs and other moving expenses. Now you’ve got your goal set up! Here’s how to find that kind of cash and fast-track your savings!

**** Cut Some Expenses in Your Budget

You’ll be amazed at how much money you find just because you’re paying attention to your spending. Here are some ideas to help you tighten your spending temporarily while you work on piling up cash for your new home:

• Take a break from the gym: $60 per month
• Make you own coffee and skip the Starbucks run in the morning-$100 per month
• Save eating out for special occasions: $250 per month
• Trim your clothing budget: $100 per month
• Buy generic brands at the grocery store: $160 per month
• Cut the cable: $60 per month

These tips could save you $630 every month! That adds up to more than $15,000 over the course of 24 months. You can always get creative and find even more ways to save!

3. Temporarily Pause on Retirement Savings

But if you’re planning on buying a house in the near future, temporarily stopping your retirement savings and redirecting those funds toward your down payment can be a great idea if you do it for a short period of time (think two years or less).

If you’re currently investing $500 a month into 401(k)s and IRAs, that means you could save around $12,000 in two years. That’s a big boost to your savings timeline! Once you’re done, you can jump right back into saving for retirement.

Words of Advice - Do not borrow from 401 K or cash out your retirement accounts in order to save up for a down payment. Not only will you get hit with taxes and early withdrawal penalties, but you’ll also cripple the long-term growth of your retirement savings. It’s a mistake that could cost you hundreds of thousands of dollars at retirement.

4. Find More Savings and Learn to Cut Corners… At Least in the Short-Term

Think twice about the “extras” that you may be accustomed to having or getting. No extravagant spending i.e.  no elaborate vacations (that alone can save $3,000-$10,000).

^{During this time some people tend to find a second job to get them to their down payment goal even faster. You probably won’t have to do it very long, but it is a good option to get to your end goal even faster.}