The first step in buying a home is usually saving up your down payment. Before buying your home, you'll generally need anywhere from 3-20% of the sale price in cash in order to qualify for your mortgage.
Even if you don’t plan on buying a house any time soon, the sooner you start saving up, the larger your down payment will be. Having a larger down payment is extremely beneficial because it means you can take a smaller mortgage, which means you'll pay less in interest.
Saving up for your downpayment might seem simple enough. But there are some thing you can do to make the process easier and faster.
Here are seven steps to help you figure out how to save up enough money for one of the biggest purchases of your life. That is, of course, without burning a giant hole in your pocket trying to get there.
Step 1: Decide how much money you need to save
Every journey should begin with some level of planning. Similarly, before you begin saving up, you should at least know how much you need to save.
The best way to figure this out is to have a chat with a mortgage lender who should provide you with some estimates. They should also offer more advice regarding which mortgage you qualify for and which are the best options based on your income.
A general rule of thumb is that your housing expenses should be no more than 28% of your monthly income.
In other words, if you earn $5,000 a month, you’ll probably be safe allocating $1,400 to your house payments in the future. This includes the cost of mortgage, interest, taxes and insurance.
Going with the same numbers and the average mortgage rate of 4.5%, you should $177,500 as the loan amount.
The amount you will likely pay for the house will include a down payment on top of the mortgage loan amount. In which case, you should expect to pay around 20% of the cost of the house as down payment.
It’s not a fixed number and it’s not completely necessary, but most good deals do come with it.
In fact, most times, you are free to put down much less, but you are more likely to pay higher interest rates. If you’re unfortunate enough to have a bad credit history, there’s a slim chance you will get the mortgage, if at all.
Step 2: Determine how long you’ll save
Once you’ve figured out how much you want to save for your downpayment, it’s time to start saving up. Step one of saving for literally anything is figuring out how soon you want to use the money.
For instance, let's say you plan on saving a $50,000 down payment to buy a home in five years. That means you'd have to save around $10,000 a year.
Then break that amount down into 12 months, which would be roughly $833 per month ($10,000/12 months) that you need to save.Now you can account for that in your monthly budget.
In the end, everything should naturally fall into place - the sooner you need to make the purchase, the higher the amount you should save.
Step 3: Choose a savings method
As a rule of thumb, if you’re saving for payments with a definite time-frame and a fixed amount, no part of your money should go into high-risk investments.
No investing in gambling, stock and real estate. If any of that money really has to go into investment, it should rather be low-risk vehicles like savings accounts or a certificate of deposit.
They may all sound boring and old-fashioned, but at least there is almost total guarantee of getting your cash back.
The one thing you really have to remember is that if you’re saving for a big purchase like a house, you don’t want to miss out on returns.
Losing any part of your money either means postponing the purchase or more sacrifices. Neither of these are too comfortable to deal with, so it’s really better to be safe than sorry.
Step 4: Adjust your budget
Since you may have to set aside a huge chunk of money if you want any real progress, you have to create some room in your budget to make it achievable.
That means you either have to find a way to fuel additional income, make some sacrifices or perhaps both.
It may sound super stressful, but creating some room in your budget is pretty effective. It will help you save even larger amounts of cash and help you prepare to manage even tighter budgets.
Owning a home may sound like bliss, and in some ways, it is. But it’s not without its chunk of expenses. Once you’re there, you’ll likely be grateful, so it’s worth embracing.
Step 5: Automate your savings
Unless you have the kind of self-control that will stop you from impulse spending, you may need to automate the savings process.
Ideally, this means you should set up some sort of savings plan. The simplest of these is a payroll savings plan. If you have direct deposit at your job, have a certain percentage of each paycheck go directly into a savings account specifically for your down payment.
This way, your money will go directly into your savings without having to do anything on your end.
Since the money moves directly to a savings account, you likely won’t even mind it happening. Besides, the bureaucracy involved in reversing the process will likely stop you from bothering, and it removes any temptations you may have. It’s a win-win!
Step 6: Save all your windfalls
Windfalls, more commonly referred to as unexpected cash, are an excellent opportunity to save up.
If you have enough willpower to bank those bonuses, gifts, tax refunds and commission checks, you will greatly speed up the saving process. If you can, you can also regularly dump a few extra hundred dollars when you feel you won’t need it.
In the end, though, windfalls can cut down the saving process by as much as half, depending on your due diligence.
Step 7: Expect the unexpected
Life is unpredictable. In a perfect world, you'd be able to save the same amount every month and your plans to save for your down payment on a mortgage would go smooth as butter. But that's not reality.
As you're saving for your down payment, unexpected expenses will pop up like impromptu car repairs, medical emergencies or even the loss of your job. Even with all these potential unfortunate circumstances, you can't let it completely derail your savings plan.
Long story short—you need to have an emergency fund.
The importance of having some money to rely on when you’re at your worst cannot be overstated. Before you even begin to save up, you should have a well-stocked emergency fund for those times life doesn’t go the way you expect it to.
If anything ever comes up, you’ll be happy you prepared.
Start saving your down payment for your home
Since buying a home will eat up so much of your savings, there are steps you need to follow to be adequately prepared.
It may take a lot of sacrifice, but you should think of it as preparation to be a homeowner. But since you’ll have so many expenses to take care of on the side, you will have to be smart about how you save.
Make a plan, be patient and stay disciplined. Before you know it, you'll be in your new home in no time.
