Saving money for a down payment has been the most daunting task I've ever attempted. With today’s housing market, most lenders are requiring a 10 to 20 percent down payment. Now, I don't know about you, but I don't have that kind of money just lying around the house (I wish!). After doing all my research, I've learned that the best way to save up enough money for a down payment is to make a plan and make it early.
Do Your Research
The first step is to thoroughly research your own finances. You need to do a lot of number crunching. For me, this involved coming up with a detailed spreadsheet. From there, I figured out how much money we need to save. Using online services like Bankrate’s Mortgage Calculator can be helpful tools when trying to get an idea of monthly payments. I know having granite counter tops and hardwood floors throughout is appealing, but it’s way smarter to go through your finances and figure out what you can afford before looking into the finishes you want.
The first step is to thoroughly research your own finances. You need to do a lot of number crunching. For me, this involved coming up with a detailed spreadsheet. From there, I figured out how much money we need to save. Using online services like Bankrate’s Mortgage Calculator can be helpful tools when trying to get an idea of monthly payments. I know having granite counter tops and hardwood floors throughout is appealing, but it’s way smarter to go through your finances and figure out what you can afford before looking into the finishes you want.
Determine a Timeline
Once you have figured out approximately how much you need to save for a down payment, you can begin to estimate how long it will take to save it. By now, you should know how much income you are bringing in every month and you can determine how much money you can set aside each month. From there, figure out how long it will take to save up your goal down payment. Don’t let the amount of time deter you! You now have a light at the end of the tunnel. You've made your goal, work towards it!
Once you have figured out approximately how much you need to save for a down payment, you can begin to estimate how long it will take to save it. By now, you should know how much income you are bringing in every month and you can determine how much money you can set aside each month. From there, figure out how long it will take to save up your goal down payment. Don’t let the amount of time deter you! You now have a light at the end of the tunnel. You've made your goal, work towards it!
Create a Strict Budget
Trust me, this is a time in your life when living frugally will pay off tremendously. It will take a lot less time to save up the money if you are able to set aside more of it every month. Reassess your current budget and your current lifestyle, and find places to trim the fat. This is definitely the hardest part for the boy and me. You need to cut habits. Substitute a cup of Folgers for Starbucks, bring your own lunch to work instead of eating out every day, start couponing. There are so many ways to cut back on spending. Get creative!
Trust me, this is a time in your life when living frugally will pay off tremendously. It will take a lot less time to save up the money if you are able to set aside more of it every month. Reassess your current budget and your current lifestyle, and find places to trim the fat. This is definitely the hardest part for the boy and me. You need to cut habits. Substitute a cup of Folgers for Starbucks, bring your own lunch to work instead of eating out every day, start couponing. There are so many ways to cut back on spending. Get creative!
Keep Your Down Payment Money Separate
Keeping all the money you’re saving for a down payment separate from your normal checking or savings account is a very good idea. You don’t want to be tempted to use it and you certainly don’t want to mix it up with your spending money. Many people open up a high yield savings account. It’s an easy way to keep track of your progress. If you’re a first-time home buyer, investing your money in an IRA account is also good move. Your money will accumulate interest toward your retirement and you can withdraw up to $10,000 without paying for it later.
Keeping all the money you’re saving for a down payment separate from your normal checking or savings account is a very good idea. You don’t want to be tempted to use it and you certainly don’t want to mix it up with your spending money. Many people open up a high yield savings account. It’s an easy way to keep track of your progress. If you’re a first-time home buyer, investing your money in an IRA account is also good move. Your money will accumulate interest toward your retirement and you can withdraw up to $10,000 without paying for it later.
If you are in a similar situation as us—not married (yet)—there is still a way to make this work. We have agreed to keep our finances separate until we are married, and even then I like the idea of keeping the majority of our money separate (it's the feminist in me, I can't help it). Since we are still working on changing our lifestyle so we can eventually start saving, we haven't gotten to this step yet. When the time comes, we will each set up our own savings accounts that are specifically for a down payment.
Use Opportunities Provided by the Government
There are many government incentives out there to encourage home buyers. Agencies to look into are the Federal Housing Administration and Veteran’s Administration, along with state housing authorities.
There are many government incentives out there to encourage home buyers. Agencies to look into are the Federal Housing Administration and Veteran’s Administration, along with state housing authorities.
Increase Your Down Payment or Pay Down Debt?
This is probably the most debated question when it comes to down payments. The answer is very circumstantial, but these are the guidelines that we chose the follow:
This is probably the most debated question when it comes to down payments. The answer is very circumstantial, but these are the guidelines that we chose the follow:
Generally speaking, it’s better to put that money towards paying off debt rather than putting it towards a larger down payment. Here’s an example so you can see the difference:
A couple has an annual income of $80,000 and has saved up $40,000 for a down payment. Let's say the couple has no debt and is approved for a $350,000 mortgage. They find a home they love that is priced at $390,000, which they can afford. Now, let’s say the couple has a $500 student loan payment every month. This would lower the amount they were approved for down to $300,000. That means the couple would have to put down an additional $50,000 to be able to afford the same house.
This is a very basic example, but it would make more sense for the couple to pay off the student loan than trying to save $50,000 more for a down payment. Where this gets iffy is when you're dealing with Private Mortgage Insurance (PMI). You are required to pay PMI if you do not put down at least 20% of the purchase price. If it means not paying PMI, sometimes it’s better to put more money down rather than pay off other debt. The best way to figure it out is to meet with a lender to go over your situation, and then come up with a plan.
