Saving for a house is an important step for many people. Owning a home can provide stability and a place to build memories with your family. It can be a financial investment, too, as home values often rise over time. Here are some tips to help you gather up a down payment to purchase a new home.
Why Saving for a House is a Noteworthy Goal and Investment
Paying for your house each month helps build your equity. This means you own more of your home as you pay off your mortgage. When you sell your home, you can use the money for other goals.
Many places offer tax benefits to homeowners that can minimize your tax burden and make home ownership more affordable. Check to see if this is true for your area.
Unlike renting, owning a house also gives you more control. You can decorate, renovate, or make other changes to suit your needs. This personal freedom is another reason many choose to buy a home.
That said, saving for a house requires planning and discipline. That said, doing so can help you build money-saving habits for the future. You’ll figure out how to budget and prioritize your spending while building sound financial habits that will serve you well for years to come.
How to Save for a House
In a nutshell, saving for a house requires you to set clear goals, assess your current financial situation, and create a budget and saving plan to help you reach the finish line. It’s also worth exploring different savings strategies and vehicles, and you can look at curbing expenses to boost savings. There are also assistance programs that may be able to lend a helping hand so you can get into your new home sooner.
Setting Your Savings Goal
Determining the Target Amount
The first step is to determine how big of a down payment you need to purchase a home. Financial experts suggest that you put down 20%, but this figure is out of reach for many prospective homebuyers. A better idea: research home loan options and identify those that enable you to secure funding with a smaller down payment if needed. You can then use this percentage when setting your savings goal.
Understanding the Costs Involved
The amount you’ll need to buy a home spans beyond the down payment. You should also factor in closing costs, which are typically 3% to 5% of the purchase price. And you’ll also need to include the cost of moving expenses into your savings target to come up with a realistic figure.
Accounting for Emergency Funds
It can be tempting to negate your other savings goals when stashing away cash for a down payment. But that’s not in your best interest, as life could happen at any time, and you’ll need to turn to your emergency fund to get over the financial hump. Hence, saving at least three to six months’ worth of living expenses in a separate savings account is important should a financial emergency arise.
Assessing Your Current Financial Situation
Now that you have a concrete idea of how much you need to save, the next step is to take a look at your finances.
Analyzing Income and Expenses
Jot down all your monthly income and expenses. Categorize the latter as needs or wants, and subtract your total expenditures from the amount you have coming in to give you an idea of how much you can comfortably afford to save towards a down payment each month. If you have more expenses than money, scale back on some of your wants. You can also do so even if you have a surplus to meet your savings goal faster.
Identifying Debts and Liabilities
The next step is to make a list of your current debt and liabilities. This could include auto loans, personal loans, student loans, auto loans and credit card debt. If you have the means to accelerate repayment, it’s worth doing so to give you one less bill once you buy a home.
Understanding Your Credit Score
Your credit score significantly impacts the terms and rates you receive on a home loan. It ranges from 300 to 850 – the higher, the better. Some loan programs will approve you with a score as low as 580 (or 500 with a 10% down payment), but it’s worth boosting your score before applying to increase your chances of approval and getting the best mortgage deal.
Creating a Budget and Saving Plan
You’ll need to create a realistic budget to ensure you meet your savings goals in a timely manner.
Establishing a Monthly Budget
Use the income and expense figures you came up with to create a practical monthly budget. Be sure it prioritizes your down payment savings and accounts for all your monthly expenses. Otherwise, your new plan will backfire.
Identifying Areas to Cut Back
Again, if your current expenses are stretching your budget thin, identify ways to scale back. Even if you have enough to cover all your bills, you still want enough wiggle room in your budget to save up for a down payment. So, additional cuts, even if they’re temporary, may be warranted.
Automating Savings
You can set up automatic transfers to your savings account to put your plan on autopilot. If you receive your paycheck via direct deposit, ask your employer to change the way your earnings are paid out. You can also schedule transfers from your checking account to your savings account on specific days each month to help you save effortlessly.
Creating a Timeline
It’s not enough to decide on how much you’ll save. You’ll also need to set a clear timeline for when you’d like to meet your goal. That way, you can break it down into milestones that are much easier to manage. To illustrate, if you want to save $9,000 in 12 months, you’ll need to deposit $750 per month into your savings account until you reach your goal.
Exploring Saving Strategies
A traditional savings account is a safe place to park your down payment savings. But there are other safe options that can make your money work harder for you.
High-Interest Savings Accounts
These accounts operate like traditional savings accounts but offer you a greater return on your money. You may be subject to minimum deposit and balance requirements or monthly maintenance fees, so be sure to read the fine print before applying to open an account.
Certificates of Deposit (CDs)
CDs are another safe bet for growing your savings faster. They also feature generous APYs but are less liquid, as you’re required to leave your funds in a CD for a set amount of time – typically six months to five years – to earn the advertised APY. Your earnings are guaranteed since the rate is fixed, but making early withdrawals often results in penalties.
Money Market Accounts
Money market accounts fuse the primary features of checking and savings accounts. You get a debit card and check-writing privileges while earning more in interest on your money. That said, you generally need to carry a larger balance to capitalize on this account option.
Investment Options
You can also park your funds in one of these popular investment vehicles:
- Mutual funds: Mutual funds allow you to pool your money with other investors to buy a diversified portfolio of stocks, bonds, or other securities. The performance of mutual funds is influenced by market trends and the management team’s decisions.
- Stocks: Stocks represent ownership in companies and have the potential for high returns, but they also come with higher risks. Stock investments can fluctuate greatly due to market conditions, making them less predictable.
- Bonds: Bonds are often considered safer investments than stocks, offering predictable returns with lower risk. They are essentially loans you give to the government or corporations, with the issuer paying you interest over time to provide a steady income stream.
Reducing Expenses to Boost Savings
As mentioned, you can cut back, even if it’s only temporary, to save more.
Cutting Unnecessary Costs
Refer back to your budget and identify the wants you have listed. Eliminate those that you can do away with to accelerate your savings efforts.
Reducing Utility Bills
Ask your utility provider about a fee-free energy audit to identify ways to lower your energy costs. They may also have programs you can participate in, like budget billing, to give you more predictable monthly bills.
Minimizing Entertainment and Dining Out
Even if you enjoy frequenting different restaurants, dining in could be the key to freeing up room in your budget. This is especially true if you eat out often or spend a ton of money each month on entertainment.
Negotiating Bills and Subscriptions
Reach out to your service providers and negotiate better deals. Ask for the customer retention department if the representatives you speak with won’t budge. Also, downgrade or cut out any subscriptions you no longer need.
Taking Advantage of Assistance Programs
There are several assistance programs that can help you get into your new home sooner rather than later.
First-Time Homebuyer Programs
First-time homebuyer programs often provide lower interest rates, reduced down payments, and in some instances, down payment assistance. Check out options offered through Fannie Mae and the Federal Housing Administration (FHA).
Employer Assistance Programs
Some employers offer financial aid to help you buy your first home. This assistance may include forgivable loans or direct grants, reducing the initial financial burden. Reach out to your human resources department to inquire and learn more.
Government Grants and Loans
Government grants and loans are also valuable resources that can greatly assist you when trying to buy a home. Programs such as those offered by the Department of Housing and Urban Development (HUD) provide specific loans aimed at helping first-time buyers.
Monitoring and Adjusting Your Plan
As time progresses, your financial situation can change, which could prompt you to adjust your plan.
Regularly Reviewing Your Progress
Be sure to review your progress monthly to determine if you’re moving in the right direction. Don’t be afraid to play catch-up if life happens and you get off track.
Adjusting Goals and Strategies as Needed
Sometimes, your financial situation can change, causing you to reassess your plan. If your income changes or unexpected expenses arise, you might need to adjust your savings goals. This could mean increasing your monthly target or extending your timeline.
Staying Motivated
Saving for a new home could be a mini-marathon, not a sprint. But you can stay motivated by breaking the goal down into smaller chunks and rewarding yourself each time you hit a target. Create a vision board of your dream home and refer to it for an extra dose of motivation when the journey gets tough or when you feel like giving up.
