Are you renting but dream about owning your own home? If you are like most people, you look at the homes in your neighborhood and wonder what it must be like to live there. With the current economic status, there is a lot of pressure on consumers to buy as a security for the future. The rent prices just keep going up and owning something is the only way to eliminate that situation. So, you need to start saving money for a house of your own and bid your landlord farewell.
The main problem that many people face is how to save up the down payment. You’re tired of paying rent but after paying rent and all your bills there is often little left to put aside in savings. Maybe you live in an apartment on the 3rd floor and have to climb stairs and would really love to have a backyard for your dog to play in.
So, how do you save for a downpayment when rent takes up so much of your money? Even if you don’t plan to buy this year, you’ve probably thought about ways to save for a down payment. In most cases, the down payment is roughly around 20% of the total amount and depending on your budget, it may take a while to save up that much money.
What is a down payment?
When applying for a mortgage, the lender will calculate the total costs of buying the home. A down payment is the money you supply in “good faith.”. This amount varies, but typically it is 20% of the total. The amount of the mortgage will be the total minus 20% which is your down payment.
What is the purpose of the down payment?
Your down payment acts as a security for your lender. Taking money from your own pocket means you are invested in the outcome of this loan. When you pay a portion to the process, it shows your commitment to owning this home and the bank can be assured that you’ll keep up your mortgage payments month after month until it’s paid off.
When you begin saving money for a house, the more money you put down in the beginning, the less you will pay monthly. If you can put down a larger down payment by saving longer, you may qualify for a shorter mortgage term and can pay off the loan in less time.
How much money do you need?
The first step is to figure out how much money you need. Before you begin saving money for a house, you first have to know how much you’ll need to save. You can use one of the handy calculators that help you figure out your down payment and monthly payments based on 15 – 30 year terms, or you can sit down with a mortgage lender and have them figure out what you qualify for and how much you’ll need to put down.
How to begin saving money for a house
Now comes the part when we determine the best way to save money for a house without breaking your budget or sacrificing the few luxuries you have living in an apartment. You need to come up with a savings plan that is not too extreme or you won’t stick to it.
How much should you save? Well, in the early stages you can estimate how much you will need to save based on the price range you want to stay in. Browse the listing and determine your price range. Then take that number and add some to it for closing costs and realtors fee. This will be your estimate. You can change this number any time you decide you want to go up a little. Say you decide to buy a two-bedroom home with a large backyard and 2-car garage. If you change your mind later on just up your savings amount.
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What steps are involved in home buying?
- Research home prices
- Apply for a government loan
- Determine your down payment amount
- Estimate closing costs
- Determine your ideal timeline
- Determine how much of your income to save
- Open a savings account or IRA
- Set up automatic transfers to your saving account
Research home prices
One way to get an idea of how much your dream home will cost is to look online and research prices on Zillow, Trulia, or Realtor.com. You can look in the neighborhood where you want to live to get an estimate of what the houses are selling for in that area.
Do you qualify for a government loan?
The government has programs for homebuyers in financial hardship, in the form of FHA loans. The loan is through the Federal Housing Administration (FHA) and if you qualify, you may be able to put down 3.5% of the purchase price. To qualify, you need to have a debt-to-income ratio below 43% and your credit score must be 580 or higher. You have to put down 10% if your credit score is less than the required number.
This type of loan is good for people who can’t come up with a large down payment, but you are required to have private mortgage insurance including the first month upfront.
Determine where to save the money and automate it
The recommendation is to save 25% of your total monthly income for your down payment. That is an easier way to save and the money can be put in your savings account or you can put it in a certificate of deposit (CD) that will mature in a designated time frame (2 years, 5 years, 10 years) when you think you’ll be ready to buy.
So figure out what your total monthly income is and subtract 25% from that amount. This money should be paid monthly as if it was a bill. You can set up automatic savings by adding it to your direct deposit. You won’t even miss it because it comes right off the top.
You can set the date for the money to be deducted from your account and placed in your saving account. So when you deposit your paychecks the amount will be automatically deducted on the date you choose so you never have to worry about making the payment.
We recommend going for a 15-year fixed rate, which will save you tens of thousands of dollars over the traditional 30-year option.
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Besides the down payment, what other costs are there?
When you buy a house you need to have the down payment, closing costs, insurance, and other fees involved in the buying process. Some other things to include in your calculations are:
Appraisal Fees
The home you plan to purchase may need to be appraised and inspected to be approved for the loan. The cost for this service is around $300 and it is the responsibility of the buyer to pay for it.
Private Mortgage Insurance (PMI)
Private Mortgage Insurance, or PMI, is a fee added to your monthly mortgage payment if your down payment is less than 20%. This amount will increase your monthly payment by about $50 per month for every $100,000 you spend on your home.
Closing Costs
Once all the fees have been calculated and the home appraised and inspected, it is time to do the paperwork. The closing costs are the final expenses involved in wrapping things up. The amount of these costs is between 2 and 5% of the total price. Fees included in the closing are often title search, application fee, a fee for your credit report, etc.
Step-by-step plan to save money
When it comes to saving money for a house, it’s a lot easier than you think. You just need to make a plan and follow the steps. Here are five steps to help you save for a down payment:
Step 1: Determine your down payment goal
If you have done your research and decided on how much you need to save, start out with this amount as your end goal. If it is 20% then you won’t need to pay the extra amount for private mortgage insurance, which will save you a few thousand dollars there. To buy a house you can afford it should be a 15-year fixed rate mortgage with payments that are not more than 25% of your monthly income.
2. Decide how long it will take you to save up?
To be obtainable, the goal must be reasonable. Two to three years is a good time frame to save enough money for your down payment. The more time you give yourself to save, the more money will accumulate in that time.
3. Set up an account to save the money in.
You can save the money in a money market savings account. It won’t earn a lot of interest in three years, but it will be safe and secure. It’s better if you have the money in a place where you won’t be tempted to spend it on other things.
Besides saving 25% of your income, you can reach your goal a little faster if you cut some expenses or take a second job. They may be little things but they do add up over time. Expenses you could cut to save more:
- Meals out $250 per month
- Cable TV $60 per month
- Clothing expenses $100 per month
- Gym membership $60 per month
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Step 4: Earn extra money
If you’re looking for another way to put more money in your savings you can pick up a side gig or a second job. Mowing lawns, cleaning houses, walking dogs in your neighborhood, or taking a part-time job on the weekends sorting mail. You could also consider house hacking. All of these will put a little extra money in your pockets every week.
Step 5: Find more money
Besides picking up a second job, you can add money to your savings by depositing your income tax refund, sell stuff you don’t need anymore and bank the cash, and skip your vacation this year and put that money in savings. If you are diligent with your savings plan you should reach your goal within the time frame you set or sooner.
Besides your savings account you should have an emergency fund to cover the small things that come up unexpectedly. That way if something breaks down you’re not forced to take money from your savings to fix it.
Home is where the heart is and it is worth every penny you put into it. It will shelter and protect you for years and years to come. It is probably one of the biggest investments you will make in your lifetime so take your time when it comes to saving money for a house. Remember, the more money you can put towards your down payment, the lower your monthly payments will be.
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