So you’ve decided it’s time to take the next step in your financial life and buy a house – congratulations! This is a great day!
But once you start looking at the numbers, the amount you’ll need for a downpayment may become daunting. Don’t despair! There are plenty of tips and tricks to save better, save quicker, and get into your dream home with less stress than you’d expect.
Let’s look at a few of the best expert tips regarding saving for a downpayment. Listen carefully to these Do’s and Don’t’s!
Step 1: Figure out how much you’ll need to save
Before you begin saving a down payment for a house, you first have to know how much you’ll need to save. Plan to sit down with a mortgage lender who will let you know how much of a mortgage you can qualify for.
Generally speaking, your housing expense should not exceed 28 percent of your stable monthly income. So if your income is $5,000, you can safely allocate $1,400 of that ($5,000 x .28) to your future house payment.
The $1,400 will include mortgage principal and interest, real estate taxes, private mortgage insurance (PMI), homeowners insurance, and homeowners association (HOA) dues, if any.
With mortgage rates at about 4.5 percent, this will translate into a mortgage loan amount of about $177,500.
To arrive at the amount that you can afford to pay for a house, you’ll have to add the down payment on top of that. In today’s tight lending market, you should generally expect to make a 20 percent down payment on a house. No, that’s not a requirement–it’s just the minimum down payment to get the best-priced deals.
You can certainly put down less, but you will likely be paying a higher rate and, if you have any kind of credit issues, you may not be able to get a mortgage at all.
So taking our example of a mortgage for $177,500, and making a provision for a 20 percent down payment, we can calculate the actual dollar amount this way:
$177,500 divided by .80 = $221,875, minus the $177,500 mortgage loan = $44,375, or rounded up, $45,000
Rounding the numbers up, you’ll be purchasing a house for $222,000, with a $177,500 mortgage, and a down payment of about $45,000.
Don’t get hung up on those calculations– a mortgage lender can perform the same calculations for you based on your own financial circumstances. We’ve done this for illustration purposes only, and so that we can carry that $45,000 number forward for more calculations.
Step 2: Determine your timeframe
The next step is to determine your timeframe. If you plan on purchasing a home in five years, you’ll have to be prepared to save $9,000 per year ($45,000 divided by five years).
Naturally, the shorter your timeframe is, the higher your annual savings goal will be.
– via Money Under 30
So you’ve done the groundwork and know how much you want to borrow and how much you want to start saving for a downpayment. What’s next?
Savings Tip #1: Automate it
When you make saving more convenient you’re more likely to do it. So make automation your friend by having a portion of your paycheck deposited into a separate savings account just for your down payment.
You might choose a fixed amount, like $200 per month. Or you can specify a percentage of each paycheck so you save more when you get a raise or bonus.
Saving Tip #2: Save all raises and bonuses
For a set period of time, consider saving all extra income you receive from work.
For instance, if you get a 3% raise, increase your down payment savings percentage by at least that amount. Or if you get quarterly or annual bonuses, transfer the full amounts to savings.
Saving Tip #3: Save your tax refunds and gifts
Don’t forget that windfalls like tax refunds, cash gifts, or inheritances give you the perfect opportunity to save for a down payment on your next home.
Savings Tips #4 Start a side hustle for extra income
Sometimes you need to get serious about creating additional income in order to save enough for a down payment.
Consider how you can use your skills to provide a service—like tutoring, website maintenance, or giving music lessons—and bring in quick money to set aside. Or you could find a part-time or seasonal job that fits into your full-time work schedule.
Saving Tip #5: Save your old car payment
If you paid off your car loan or are close to it, resist the urge to buy another one. Keep your car and save an amount equal to the payment for your down payment.
– via Quick and Dirty Tips
Are you ready to buy your first home? Have you started saving for a downpayment yet?