How to Save for a House Down Payment
Saving for a down payment can be difficult whether you are a first-time homebuyer or have extensive expertise in the real estate market. Here are seven actions you can take to guarantee you have enough money to buy a property.
Step 1: Determine your savings target.
You can’t begin saving for a down payment unless you know how much money you’ll need to put down. Many variables influence this, including:
The purchase price: If you acquire a more expensive house, you’ll need a greater down payment because the amount you must put down is normally determined as a percentage of the loan value.
. For example, if you buy a $100,000 property and put 20% down, you would need $20,000, but if you buy a $200,000 home and put 20% down, you will need $40,000.
Lender specifications: Minimum down payment requirements vary by lender, however, some enable you to put down as little as 0% to 3%, while others need a minimum of 20% or more. The finest first-time home buyer lenders are frequently more ready to take a lesser down payment.
Mortgage protection: If you put down a tiny down payment, mortgage insurance protects the lender from losses in foreclosure; however, you must pay for it, and it increases your monthly payments. Our mortgage insurance guide explains how this works in further detail.
When you intend to buy a house. Your purchasing schedule will allow you to determine the amount you need to save each month.
Step 2: Consider including closing fees in your estimates.
You must save not just for a down payment but also for any closing expenses imposed by your lender. These must be paid in full when your loan is closed. They can add between 2% and 5% to the value of your property.
Closing expenses may be included in your loan by some mortgage providers. However, this implies that you are borrowing even more money. As a result, if you want to bundle closing expenses into your loan, it may be more difficult to get accepted for a mortgage. This can also increase your closing expenses over time because you’ll be paying interest on them.
Step 3: Determine which account your down payment should be held in.
Saving for a down payment takes time. To reach your savings goal, you must store the money in a secure location until you are ready to purchase. You don’t want to take the chance of losing money in the stock market. This is especially true if you want to purchase a home soon.
Savings accounts with high yields are frequently the ideal location to deposit your down payment. These accounts allow you to access your funds whenever you want and provide a greater interest rate than a regular checking or savings account.
You also have no chance of losing your funds if your bank is FDIC insured.
You may also look at risk-free products like certificates of deposit (also known as “CDs”). Check out our guide if you’ve never heard of CDs: What Is a Compact Disc?
If you decide to buy a CD, check around for the best CD rates and compare them to the interest given by a high-yield savings account. However, keep in mind that CDs have tight withdrawal restrictions. Unless you pay a penalty, you may not be able to access your money when you need it right away.
Step 4: Establish a timetable for accomplishing your goal.
When you know when you want to buy a house, you can figure out how much money you need to save each month to make the down payment. As an example:
If you want to buy a home in two years and require a $50,000 down payment, you must save $1,923.08 every month.
If you want to buy a home in five years and require a $50,000 down payment, you must save $833.33 every month.
Step 5: Make saving a priority in your monthly budget.
Create a budget that regards this amount as a must-pay expense once you’ve determined how much you must save each month based on your schedule and down payment amount.
Step 6: Monitor your development.
Keep track of how your down payment fund is increasing. Check to see if you’re on track with your monthly donations.
This keeps you motivated as you see your money rise. It might also assist you in changing your route if you are not saving enough. If you notice insufficient improvement, you may opt to make more spending cutbacks. You might also try picking up a second job and saving the additional money.
