So it’s come time for you to stop renting and start thinking about buying your own place. Your forever home, a place to start a new life and build a family. This may seem like a daunting task and it’s probably going to cost you more than what you find down the back of the sofa. Buying a home doesn’t have to be luck, or for people who are a lot older in their life. If you plan and take the right steps you can reach your goal of stepping onto the property ladder in no time.
There are a few stepsyou need to take and a big one is the down payment. This will help you out in the long run when you buy a house and it will determine the price you are going to pay through your entire mortgage.
We are going to go through some tips on saving, and the kind of expenses you should expect to pay when you buy a house. Some may be obvious but there may be a few hidden costs that you didn’t first think about or even know. Sit back, relax and let us get you on the right track to becoming a home owner.
What Is a Down Payment?
Let’s start with the easy stuff. A downpayment is a lump sum of cash that you bring to the closing table when buying a home. This acts as a deposit and shows the lender you are responsible enough to save an initial payment towards your new home. You may be borrowing money from the bank as a home loan or a mortgage, but some of the total cost of the property you’re buying must come directly from you.
The main reason why is that this down payment acts as a kind of insurance to your lender. When you hand over money from your personal account, you’re officially invested in the property. Banks want to work with people like you, especially if you are making payments month after month, year after year.
When you save up for a down payment, you not only show responsibility and trust to the lender, but you also set your own mind at ease. A good chunk of payment reduces your monthly overall costs allowing you to choose a shorter mortgage term or lower payments. This can help you wave goodbye to your debt a lot sooner.
Am I In a Position to Start Saving for a Down Payment?
When it comes to buying a home, it’s not just about saving money. The timing comes into the equation when you buy a house and how will you really know when it’s time to start saving for a down payment?
Set a beginner emergency fund of around $1000, this will be a good safety cushion if you come into some unexpected expenses. The best way to start is to try and get rid of all your non-mortgage debts. You don’t want to be trying to save while still maybe paying off the credit cards you accurred in your younger years. After everything is paid off and you’re in the black then it’s time to put even more into your emergency fund. Try and accure around 3 months of your usual expenses.
When you have tackled these first three steps you will be ready to buy a home, and here’s why:
- You won’t have to reduce your debt payoff plan to save for a down payment, leaving you to be debt-free much earlier.
- You’ll be prepared for the unavoidable emergencies that come when you buy a home.
- You’ll have space in your budget to move through the remaining life saving steps:
- Invest for retirement.
- Save for children’s college.
- Pay off your home early.
- Build wealth and give generously.
Trust us when we say that timing is everything. If you get this right all you’ll have to worry about is what color carpet you’re going to use in your living room.
Determine How Much Your Down Payment Could Be:
If you’re not in a position to pay for your home in cash outright, (and really, who is?) Then a downpayment is going to be the next best thing. They are required by lenders to show you can collect enough money to act as a deposit. 10% of your new home is a great start and should be the minimum you save to put as a down payment. 20% is better, it will mean that you won’t have to pay an extra PMI cost within your mortgage payments.
What Other Costs Should I Consider When Saving for a Down Payment?
We’ve not forgotten that lenders will never be your best friend when it comes to money. They expect more than just a down payment. You will also also be required to pay extra fees that you may have thought to seem hidden if you aren’t aware of them already.
Here is a list of extra fees, so you have no nasty surprises along the way.
Private Mortgage Insurance (PMI)
Short for Private Mortgage Insurance, PMI is a fee added to your monthly mortgage payments if you paid less than 20% as the down payment on your home. PMI will add around $50 for every $100,000 you spend on your home.
Appraisal and Inspection Fees
To have your lender completely sign off on your mortgage, you’ll need to have your future home appraised and inspected. This usually costs around $300.
There is a lot of work that goes into getting a signature on the dotted line. If your lender doesn’t agree to pay the costs, you will be responsible for fees between 2% and 5% of your mortgage’s total value.
For example, if you plan to save $29,000 for your down payment of 15% of your new home. A little more money needs to be set aside to cover the complete payments with the now known hidden costs. Here are the maths:
- If you purchase a $145,000 home with $21,750 down.
- Your mortgage equals $116,000.
- The price to cover the first month’s PMI at closing will be $65.
- An appraisal and inspection will be $600.
- Fees from closing costs could be as much as $5,800.
- In addition to the $21,750 down payment you have set aside, you will need an additional $6,465.
And, if you’re lucky enough to get the seller to agree to cover closing costs, that will leave you with a good proportion of money that can be used on something else.
Steps to Save for a Down Payment:
When it comes to the time that you are starting to save up for a house, it can feel a little overwhelming, but do not fear; it’s a lot simpler than you would of first thought. The best way to start is by planning. We’ve gathered 5 steps you should take to help reach your goal:
Step 1: Start With a Clear Down Payment Savings Goal
Before the saving begins, it’s important to know what your target goal is going to be. What is a good down payment? Putting down the entire cost of a house is a great way to save some money, but is not feasible for everyone.
Try and ask yourself these three important questions to decide what your down payment saving goal should be:
1. How much should I save for a down payment?
If paying cash isn’t going to be a feasible option for you, try and plan to put at least 10% of the costs down. If you can, 20% is even better. 20% is ideal as it means you won’t have to fork out the extra costs of Private Mortgage Insurance (PMI) – an extra cost that your lender will add to your monthly payments, just in case you cannot make all of the payments on your loan.
When it comes to your mortgage, you want to think 15 and 25. These are a 15-year fixed-rate mortgage payment that equals 25% of your usual monthly income. Finding a home that fits your budget can sometimes be a pain. If you use a trusted real estate agent when buying a home, like an Endorsed Local Provider (ELP), they can help you find a home that is based on your price range.
2. How long is it going to take me to save for that down payment?
The time it will take you to save for your down payment is really down to you, but hard work and patients will really pay off! It’s a simple process, but the more time you spend saving up, the more money you can save. Having more money saved up means your mortgage payment will be less each month, and you’ll pay less money in the long run.
If you can stay focused,, you should save enough money for your down payment in two to three years. Make sure you don’t really drag out, saving much longer than that. You’ve loads more money goals to save up for next so when you buy a house, it shouldn’t take longer than this.
3. Where is the best place to put the money I’m saving for a down payment?
In the majority of cases, a down payment is not an investment. So it is a good idea to keep your cash in a money market savings account. It will be safe and even might make a little bit of interest along the way, it will never be massive amounts, but you’re not going to lose any money, which is the main thing.
So if you give yourself a timeframe of 2 years and plan to save money in the region of around $40,000 to cover your down payment and any of the hidden fees we have spoken about previously, you now have a goal. Step 1, completed! Now here’s how to fast track those savings.
Step 2: Cut Some of Your Existing Expenses
Let’s begin with the current wage you bring home every month, and let’s see what things you can probably live without.
When you pay attention to your spending, you’ll be amazed at how much extra money you can find. Here are a few tips on how you can help tighten your spending temporarily while you are pushing towards buying your first home:
- Cut the gym out and go for a run: $60 per month.
- Only eat out on special occasions: $250 per month.
- Trim down your clothing budget: $100 per month
- Buy generic brands at the grocery store: $160 per month.
- Stop the cable TV for a little while: $60 per month
Doing these 5 simple things can save you $630 every month! Added up, that equals over $15,000 over the 2 year period you have set for your goal. Now it’s just time to start thinking of some creative ways to save the rest!
Step 3: Press Pause on Retirement Savings
If you have already started putting money towards your retirement, then this may feel strange but stop! It is recommended that you invest 15% of your household income into your retirement pot, but if you plan on buying a house shortly you can stick this on hold.
Do not worry; once you have completed your goal after your set two year period, you can start putting your money straight back into the retirement fund ready for those older years.
A good way to think about it is if you’re investing $500 a month currently into 401(k)s and IRAs. Then start putting that money towards the down payment fund. In two years, you could potentially save around $12,000—a massive boost to your savings timeline.
We never recommend that you take money out of your retirement fund to save up money for your buying a home. You will get hit with taxes and penalties for withdrawing your money early and damage your savings’ long-term growth. It could cost you a lot of money when it comes to retirement, and we think it’s just not worth it at all.
Step 4: Increase Your Income With a Side Hustle
If you’re looking for a way you can really boost your income, a second job is a great way to get to your savings goal a lot quicker.
Having a side hustle doesn’t mean you are in store for a gruesome work filled a couple of years, either. Try to think about the things you already love doing, then a side hustle won’t even feel like work. Check out these few examples:
- Do you exercise regularly? Why don’t you walk the neighborhood dogs after work or referee sports games on the weekend? Bringing home some extra cash whilst also keep fit. That’s a win!
- Do you have a love for teaching? Tutoring, you can expect to make between $30 and $40 an hour. This is even more if you live in a big city or have an advanced degree.
- A pet lover? Let your friends and colleagues know you can take care of their family pooch any time they like. Get some stress free loving whilst getting paid all at the same time.
So, do you think it’s worth it? Well, let’s say you are working an extra 16 hours a week, making $10 an hour. After-tax, that’s $120 a week. If you can keep that up for 2 years, you will have over $12,400 in down payment savings.
Step 5: Find More Savings and Income in The Margins
Now, it’s time to bring the big guns out and be strict with yourself. It might be a pain, but it will be worthwhile if you keep your sights and mind on making your home sweet home.
- Ditch the summer holiday. You could easily save $2,000 from that alone.
- Do you have lots of stuff lying around the house collecting dust? Why don’t you sell it! You can take full advantage of many different online sites or even a good old fashioned garage sale to help bring in some of those extra dollar bills. If you can get an extra $500 from a Saturday morning garage sale, then we think that’s a win for sure!
- Getting a raise or an annual bonus? Don’t splash it on that new flat-screen TV. It can wait. Put your money into savings, and you could easily bump it up by a couple of thousand dollars.
Creative Ways to Save for a Down Payment:
If you work everything out and realize that your monthly savings amount is just too high, that is okay. Give yourself a little more time so that you can reach your goal. Always be on the lookout for creative ways you can raise the funds for your down payment. Here are some ways you can do this:
1. Set up a Down Payment Fund.
When you have figured out what you need to save each month you should try and create a budget you can track your savings with and reach your target goal for mortgage payment.
2. Try and always throw any extra money towards your house payment goal.
Look for unique ways you can you can add to your your goal when you save money. There are a few simple ways you can really help to save money. When you buy a home sometimes its the easy tasks you can live without which will help you the most.
Here are a few ideas:
- Stop your Cable TV
- Pack your lunch
- Make coffee at home
- Cancel any gym memberships
- Work overtime
- Start a side business
- Get a second job
3. Store your down payment savings the smart way.
When you’re saving, there will be lots of temptation when it comes to your money. A little europe trip or even the new car you have always wanted. Trust us, this does happen.
To protect yourself for any kind of temptation don’t store your down payment money in your regular bank. Even the little $10 here and there will make a considerable affect on your final down payment saving over time. Try and separate your money into a dedicated savings account or even try a money market account instead.
What is the fastest way to save for a house?
The fastest way to gain the funds for your new home is to be frugal, and simply just start saving. Stop spending on those little luxuries such as Netflix, Amazon, and gym memberships. These can all be sources from somewhere else and you could always go for a run rather than use the treadmill at the gym.
How much money should you have saved up for a house?
When it comes to how much you should be saving it totally depends on the kind of home you want to buy. Between 10% and 20% is ideal for your downpayment and will put you in a good position for when you’re setting up your monthly mortgage plan.
How long does it take to save for a house?
Saving to buy a home shouldn’t take a massive amount of time, we believe 2 to 3 years should be more than enough time to really gather enough money for a down payment. There are other saving goals in your lifetime so when you buy a home it shouldn’t take up much more time than this.
What is the best account to save for a house?
When it comes to keeping your money in an account to buy a home you want something that is going to add a little interest and that you can’t get at with ease. Your personal account is not a good idea. Temptation does happen and however good that holiday would be, it just brings you further away from your goal to buy a home.