If you have been a renter for a long time or already own a home but are eager for an upgrade, chances are, you will need to sock away some money for a down payment. Here, we have outlines our best tips on how to save for a down payment.
How to save for a down payment
The first thing you will need to do before you begin saving for a house is to know how much money you need to save. Sitting down with a mortgage broker to find out how much house you qualify for is a good idea—let us know if you need a recommendation for someone to work with! The information you get from the mortgage broker will give you a baseline from which to work to figure out how much you need to save for a down payment. For a conventional loan, you are looking at somewhere in the neighborhood of 5 to 20 percent of the home price for the total down payment.
Saving for a house calculator
So, for example, if you were looking to buy a $250,000 house, having a $50,000 down payment would mean that your mortgage would only be $200,000 whereas a 5 percent down payment would be $12,500 and your mortgage amount would be $237,500.
Obviously, the higher your down payment, the lower your monthly mortgage payments. The term of your loan will also factor into the monthly payment, as will your credit score and whether or not you need to have private mortgage insurance (PMI)—typically something you will have to deal with if your down payment is less than 20 percent. You can read more about how your down payment will impact your mortgage here.
5 Tips To Get You Started
Hopefully, after speaking with a mortgage broker, you have gotten a solid goal in mind for the amount of down payment money you would like to save. Here are five ways to get started saving for a down payment now:
- Pay down your credit card debt: If you have a substantial amount of credit card debt (more than you can pay off in a single month) it is time to get that paid off ASAP. The interest you are likely paying on the balance is more than any return you will get from saving your money. The most prudent thing to do in this scenario is to make the largest payments you can, as frequently as you can until your credit card is paid off. Plus, this will help your credit score when it comes time to get serious about getting pre-qualified for a mortgage.
- Pay yourself first (or, after the credit card): Have a portion of your paycheck directly deposited into a savings account exclusively for your down payment money. Budget to be sure you can live off of the remaining money and are not tempted to dip into your savings to cover routine costs.
- There is an app for that: Many savings apps, ranging in complexity, now exist to make saving money for a down payment easier than ever. Some people like Acorns, an app which rounds up your transactions to deposit your spare change into an investment portfolio. For example, if you put $9.22 for lunch on your debit card, Acorns would automatically take 78¢ and deposit it into your Acorns account. As your money adds up, it is all invested into a variety of stocks, bonds, and other assets, with the riskiness of those investments based on your preferences, ranging from conservative to aggressive. Another popular, more straightforward app is Digit. This app analyzes your income and your spending habits to automatically save money that it determines (based on its calculations) you will not really miss. In addition to checking balances and requesting it to save more money, you can also withdraw some or all of your money at any time by sending a simple text message.
- Side gigs pay: With companies like Lyft and Postmates, virtually anyone can have an extra job on the side and set their own hours. If driving around is not your thing (maybe you do not want to put the miles on your car), consider getting another job in addition to your day job like valet parking cars at night or babysitting on the weekends. Then, take all of the money you make from your extra work and stick it all into your down payment savings.
- Analyze your habits: Are you addicted to your $6 latte every day before work? Multiply that out (assuming you only get one, five days a week) and you are looking at over $1,500 in a year. Buy yourself a french press and make your own coffee to see the savings add up. Then, take that same concept and apply it to other areas of your life. Perhaps you start packing a lunch instead of eating out, entertaining friends at your house instead of hitting up bars and restaurants or skipping costly salon and spa treatments in favor of DIY at-home treatments instead.
How to save for down payment while renting
If you are leasing your current home, you will likely need to go to even more extreme measures to save for a down payment while renting. Renters do not have the home equity that homeowners enjoy to roll over into the down payment on a new home. Consider getting a roommate, listing your apartment on AirBnB. In addition to all of the tips outlined above, save yourself even more money by opting for generic brands at the grocery store, consider a rice and beans diet and if you are near the end of your lease term consider moving into a cheaper place or—*gasp*—back in with your parents to cut down on your monthly expenses.
How to save for a house on a low income
If you are trying to save for a house on a low income, then you will absolutely want to follow all of the tips above. The next piece of advice is to not get discouraged—every little bit of savings helps. If you cannot find a way to increase your income to save more aggressively, you will need to be exceptionally more diligent about saving and keep your end goal in mind. The satisfaction you have when you are finally sitting in a house that you can call your own will be all the better.
After going through all the hassle of saving for a down payment, the last thing you want to do is rely on a real estate professional who does not know what they are doing. Your home is among the smartest and the most important investments you can make and you need to partner with someone who will keep your best interests at heart and help you make a solid financial decision. No matter where you are in the savings process, give us a call today. We would be more than happy to talk through the things you want in a home, your target budget and potentially offer up some ideas for ways you can find a home that will fulfill your needs at a lower price point.