So, you’ve been thinking about jumping into the housing market and buying your first home. You’ve already played around with an online mortgage payment calculator to get a range of how much mortgage you can afford and now you’re just wondering how you can save up for a downpayment as quickly as you can. Knowing how to save for a downpayment takes a little bit of planning, a lot of discipline, and sometimes more time than you realize.
Begin with a plan
The first task is to create a plan. You need to know where you’re going so you can successfully plot your course. Let’s assume you’d like to purchase a home with a sales price of $250,000. Your lender will require a downpayment of at least 3% of the sale price of the home, depending on the type of loan you choose. In this example, 3% of $250,000 equals a $7,500 downpayment.
Remember, the more downpayment you put toward the loan, the lower your monthly payments will be and the less interest you will have to pay during the life of your loan. Also, lenders typically add Primary Mortgage Insurance (PMI) to any conventional loan having less than a 20% downpayment. PMI increases the amount of your monthly mortgage payment, so if you aim to put 20% down you can eliminate from having to pay PMI altogether.
If you decide to put a 20% downpayment on a $250,000 home, you’ll need to come up with $50,000. It may take some time to accumulate $50,000, especially if you are just starting to save.
You will also need to decide how aggressive you can be in saving for your downpayment. Let’s say you’d like to have $50,000 saved in two years. That means you will need to set aside approximately $2,100 each month to achieve your goal. Where will that money come from? Well, to help you out here is how to save for a downpayment in 7 simple steps so you can get on the path to homeownership.
Step one: Eliminate high-interest credit card debt
To eliminate high-interest credit card debt and save for a downpayment, organize your credit cards from highest interest rate to lowest and work to pay them off in that order. Another idea is for you to consider transferring high-interest rate cards to a zero percent interest rate offer. Banks often provide up to 12 months with no interest charged on these cards. This can be a great way to eliminate your debt as long as there are no annual fees or balance transfer fees associated with the card, and only if you can get the debt paid off within the promotional period.
Pro Tip: Paying down high-interest debt will also help you in attaining a lower interest rate on your home loan when you’re ready to apply and start the homebuying process.
Step two: Tighten up your spending
This is where you take a good, hard look at your monthly budget. What are you currently paying for that you can (temporarily or permanently) do without? Here are some ideas to get you started:
- Look at your grocery bill: Do you regularly eat name-brand foods? Do you shop at the upscale grocer in town or the grocery store that’s known to have cheaper prices? Have you thought about changing out some of your brand name products for the alternative brand? By making a concerted effort to switch to off-brand or store brand labels, you will be able to shave dollars off your food bill and add those dollars back into the downpayment fund.
- Eliminating high-priced meals: Speaking of food, you may want to think about eliminating higher-priced meals from your grocery bills such as prepared foods and certain cuts of meat. Instead, contact farmers in your area to see if they are selling meat directly to the public. Many local farmers will sell beef by the whole, half, or quarters at prices cheaper than what you’ll pay at the store.
- Lose the $5 designer coffee: If you’re treating yourself five days a week to high-priced beverages, over two years that’s $2,600 that could instead go toward your downpayment for a new home.
- Scan your cable bill: Cable service can cost hundreds of dollars per month, easily. Consider eliminating it and save money by subscribing to a streaming service or buy an HD antenna for a one time cost.
- Second guess your gym membership: Giving that up and replacing it with at-home exercise can save a lot of money. Use your phone to download free workout apps instead. These should help you stay motivated and still reach your goals, both physically and financially.
- Reduce eating out and take out: Now may be the time to focus more on preparing homemade meals that cost a fraction of having someone else cook your meals for you. Place the savings in your downpayment fund instead.
- Look at reducing your cell phone plan: Would you be willing to switch your cell phone service to a no-contract plan? It might be worth checking out to help you save even more money.
- Lose the subscriptions: How many services or products do you have subscriptions for? How many do you actually use? Eliminating most or all of these can certainly put money back into your pocket and help you get closer to your goal of homeownership.
Step three: Get a side hustle
A great way to turbocharge your savings is to take on a second job or side hustle. When considering a side hustle, think about options that both complement your current profession and those that appeal more to your sense of passion.
For instance, maybe you work as a schoolteacher but you love refinishing furniture. Refinishing furniture could be something you could do evenings and weekends to earn extra money to hit your downpayment goals.
Other side gig ideas might be for you to substitute teach or sell some of your unused possessions online. Are you creative? Maybe it’s time you started your own business by selling your creations.
Step four: Stash away ‘found money’
Found money is money you receive somewhat unexpectedly, like a stimulus check you didn’t know was coming. Instead of spending it, drop it in your downpayment savings account right away.
It could also be an annual raise, inheritance, or a bonus from work that you receive infrequently. If you get a raise at work, continue to live off your previous income and put that extra amount from the raise directly into your savings account each payday.
Remember that high-interest credit card debt you paid off in Step One? Once that card is paid in full, continue paying yourself the same amount as if you still had the payment every month, but instead pay it into your downpayment fund.
Step five: Track every dime you spend
Be watchful of places where there may be savings waiting to happen. Have you been thinking about trading in your old car for a newer model? See if you can put it off for after you buy your home and instead put that money into your downpayment savings account.
Do you indulge in a luxury vacation once or twice each year? Or maybe you take a couple of smaller, weekend getaway trips each month. Instead, look into staycation ideas, and drop the money you would be spending on gas, lodging, and food right into your savings.
Tighten up your clothing allowance. This may not be the time to get that purse in both colors or worry about the latest fashion trends. Instead, put that clothing money aside to save for a downpayment.
Step six: Borrow from relatives to help save for a downpayment
Lenders usually allow borrowers to use monetary gifts from family for a portion of the downpayment. Typically, a Gift Letter is required from the family member who is giving the gift. This letter states the funds are indeed a gift and no repayment is expected.
Step seven: Consider (temporarily) redirecting your retirement savings
Another opportunity for downpayment savings is to redirect a portion (or all) of your monthly retirement savings toward your downpayment. Your retirement savings are an investment in your future, but so is owning a home. Using your retirement savings or 401k to buy a home is another temporary measure and if it doesn’t jeopardize your retirement in any way, it could be a great way to help you reach your downpayment goal even faster. Just make sure that after you reach your downpayment goal that you start putting money back towards your retirement.
There are many ways you can save for a downpayment to buy a home. The trick is to have a plan in place and find ways to save that will work for you. It’ll take time and determination, but soon you’ll be sipping coffee from your new back deck and then all the effort that went into accumulating your downpayment will have been worth it.