For many people, the first step to buying a home is saving up for their down payment. It can feel like a difficult goal when you first start saving, even if you don't plan on buying for years. But there are a few things you can do to help speed up the process. Here are a few tips to help you start saving for your new home.
Determine your budget
Knowing how much you need to save will help you create a focused plan for reaching your goal. To do this, you need to consider how much you can afford for your new home. Keep in mind that most people can qualify for a bigger mortgage than they can comfortably afford. Use a mortgage affordability calculator to help you determine what you could borrow, then speak with a home lending advisor to better understand what fits your budget.
Perhaps the most common down payment amount you’ve heard of is 20%, but there are lower down payment options available. However, a higher down payment can mean lower monthly payments, and you’ll pay less interest over the life of your loan. It can also help you avoid the extra expense of private mortgage insurance (PMI).
Don't forget to calculate the other costs of buying a home, including things like:
- Closing costs and fees
- Homeowners insurance and property taxes
- Moving costs
By taking all these expenses into account, you'll have a better estimate of how much you'll need to save.
Think about your timeline
Thinking about when you want to buy a home will help you start planning for how to save. Decide on a time frame, then break your savings amount down into monthly amounts. For instance, say you want to buy a home in five years and you need to save $60,000 for the down payment and other costs:
- You'd need to save $1,000 a month for five years ($60,000/60 months = $1,000 per month).
If that’s not doable, you may need to adjust your plans. You can look at decreasing your mortgage amount or finding ways to increase your income. Or, you may want to adjust your timeline. If you waited seven years to buy a house instead of five, you'd only need to save $715 a month.
Having a monthly savings plan can help you focus your efforts and make your down payment goal more achievable. It can also help you make better decisions about what you can afford and a reasonable timeline for doing so.
Pay down your debt
When you are trying to save for a home, it can feel counterintuitive to spend money paying down debt. After all, shouldn't every extra penny be going into a savings account? Not necessarily. Paying down your debt can help with your home purchase in two main ways:
- It's good for your credit score. Credit scores have a big impact when it comes to qualifying for a mortgage. The better your credit score, the lower your mortgage interest rate is likely to be. By paying down your debt, you can have a positive impact on your credit score. It shows lenders you’re responsible, and it also shows you’re able to cover your expenses.
- It can free up savings in the future. By paying down debt you can gain some wiggle room in your monthly budget. The money you used to pay bills can now go directly into your savings account rather than paying interest on other debts like credit cards. The bonus is that you won't notice the difference in your budget because the money was going out, anyway.
Paying down your debt can help you once you buy your home, too. The money you were spending can now go toward updating and decorating your new place.
Reduce your expenses
Now’s a great time to take a close look at your expenses and decide what you can do without for now so you can save for a home. Saving doesn't have to mean eliminating all your discretionary spending. But the more you cut back, the faster you'll reach your financial goal. Here are a few steps to reduce your expenses:
- Start by listing all of your expenses, then look at where you could cut back. Consider everything, even an expense like rent. Could you move into a less expensive property or split the bills with a roommate?
- Take a close look at your monthly membership expenses. Do you need cable when you use streaming services most of the time? Or could you ditch the gym membership in favor of running local trails? Maybe brew coffee at home instead of going to the local coffee shop?
Only you can decide what you’re willing to live without while you work to save for your down payment. But remember, you won't be saving for a down payment forever. A few years without that subscription will feel worth it when you’re sitting in your new home.
Automate your savings
The more you can automate your savings, the easier it can be to stick to the plan. Create a monthly automatic withdrawal on payday to send money directly to your savings account. That way it moves without you ever seeing it. Make sure you keep your savings separate, too, either by opening a new account with your current bank or even opening a new account with another bank.
This sort of automated savings plan is known as "paying yourself first." You pay your savings account first, then see what's left to spend for the rest of the month. This removes the temptation of waiting to see what's left to save at the end of the month.
If you aren't sure how to set up an automatic transfer to your savings account, talk to your bank. There are also savings apps that can help you automate the process. Just be sure you read the fine print to make sure the money will be available for withdrawal when you need it.
Put "found"money to work
Found money is the money you earn that doesn't come from your monthly income. It's those unexpected windfalls that you don't factor into your budget. Things like tax refunds, cash gifts for birthdays or holidays, a bonus at work and rebate offers are all "found" money.
Instead of pocketing the money, put it towards paying down your debt or building up your savings. Even small amounts here and there can add up quickly over the years you are saving for your home.
For example, say you have a goal of saving $715 a month towards your new home. One month, you get a bonus at work of $500. Another month, you get a gift of $200 on your birthday. Then a $15 rebate shows up in the mail. Over the course of a year, you've saved an extra month's worth of savings.
Cover yourself with an emergency fund
Plans are great, but life happens. Protect yourself and your savings by creating an emergency fund. Set aside some cash that you can dip into for unexpected expenses like car repairs or a medical emergency. You can use this money instead of paying with a high-interest credit card or pulling from your down payment funds. When the emergency is over, pay back your emergency fund first, then resume your savings plan.
When you start saving, it can feel like you have a long way to go to reach your ultimate goal. But as the months go by, your enthusiasm will build as your savings does. While you’re saving, make sure you know all of your mortgage options and keep an eye on interest rates. When you’re ready, talk to a Home Lending Advisor to see how we can help.