How to Save Money for a House Down Payment
We’ve been diving deep on the topic of home ownership these days. After all, this is one of the biggest milestones in adulthood! However, there’s a lot to consider when preparing your finances for home ownership, particularly when it comes to a down payment. Today, we've enlisted some help from our friends at Morty, the world's first fully digital, fully automated mortgage broker to talk about how to save for a down payment on a home.
No matter how you slice it, buying a home means shelling out some serious money. If you’re even thinking about buying a home, now's the time to start getting serious about a down payment.
Down payments are serious business. A larger down payment could equal a lower interest rate on a mortgage. It could also mean borrowing less or paying the mortgage off faster. And it could mean avoiding fees like private mortgage insurance. While not all mortgages require a down payment, having one gives you more options.
Plus, the size of your down payment determines how much equity you start out with when you purchase your new home.
Figure Out How Much Money You'll Need
It's easy to see why saving for a down payment is a good idea, but it can seem like a daunting task. But, like most lofty goals, you can break the process down into smaller, more manageable steps. To start, consider what your housing needs are. Then research the cost of homes in your target area that meet your needs.
Housing markets change year to year. That means the actual price for the kind of home you’re interested in buying may be higher (or lower) by the time you're ready to buy. But taking a quick look at what homes cost now will give you a rough idea of how much money you’ll need to save for later.
Generally, mortgage lenders like to see a down payment of 20% of the cost of the home. With 20% down, you’ll have less trouble finding a lender, and you’ll avoid paying private mortgage insurance (PMI). (This insurance protects the lender in case you default on your mortgage.) Now, 20% of any mortgage is a significant amount of money. But if it's at all feasible, create a goal of saving 20% of the average cost of homes in your desired area.
If saving 20% of the cost of a home in your area really isn’t feasible, there are mortgages available that don't require 20%. For example, the Federal Housing Administration (FHA) offers mortgages to first-time homebuyers. Veterans Affairs (VA) also offers downpayment-free homes, but exclusively for people in the armed services. Your state and local government may also have programs to help. Make sure you do your research!
With that said, even if you decide not to pay 20% down, you’ll still be much better off with significant savings. Mull it over, check out what homes cost in your area, and set a goal for the amount of money you want to save for a home.
Automate Your Down Payment Savings
Once you set a goal amount, you’ll want to set up a plan to get that amount of money into your savings account.
The simplest way to save is to set up an automated transfer of funds from your paycheck or checking account directly into a savings account.
Pick a set dollar amount to transfer at the same time every month. Or you could choose a percentage of each paycheck to automatically go into savings on paydays. The idea here is to make savings happen automatically without needing to remember to transfer the money yourself each month. For most of us, it’s lot easier to avoid spending money when we don’t see it in our checking accounts.
Keep in mind also that your regular old savings account might not be the best you can get. Interest rates are generally low right now, so you won’t get a huge return on any savings account. But when you’re talking about tens of thousands of dollars, even fractions of a percent in interest can make a difference.
So, where should you save? Look for high-yield savings accounts, money market accounts, and CDs.
High-yield savings accounts look like regular savings accounts, but they come with much more competitive interest rates. Online banks like Ally and Radius Bank tend to offer the best rates these days.
If you've already made some progress with your down payment savings, you might want to look at money market accounts. These accounts can offer even higher returns, but they also require larger balances. Capital One 360 is another online bank offering competitive interest rates in this area.
And if you already know that buying a home is at least a few years away, check out a CD. A CD is a certificate of deposit account and it ties up your money for a set period of time, for which you can earn more interest. For CDs, credit unions tend to offer high-interest rates in comparison to the rest of the market.
Look for Extra Money to Pad Your Down Payment Savings
Once you have your automated savings plan set up, you’ll want to keep an eye out for any extra money you could use to reach your goal faster.
Tax refund? Put it in savings. Holiday bonus? Put it in savings. Great aunt sends some money your way? Put it in savings.
If your income goes up, stay on your old budget. In other words, live off of your old salary and move the extra you're now earning into your down payment savings account. You could even update your automatic transfer to savings to do this for you.
This is a great savings tactic because you're not likely to miss money you aren't used to having in the first place. Similarly, if your expenses go down for some reason - let’s say you pay off your car or a student loan - put the money that was going to your monthly payments in your savings.
Of course, savings isn’t an all or nothing game. If this plan is too austere for you, consider earmarking just some of your extra funds for down payment savings. Maybe all of your holiday bonus but only half of your tax refund would go to savings, for example. As long as you're saving, it's up to you to decide what the right pace is.
Keep Your Eye on the Prize
No matter what you do, keep your eyes on your goal. Once you get going, it can be a lot of fun to watch your savings grow. It might take a little while. But with some planning, you may be surprised at how quickly you can put together enough money for a down payment on a place of your own.
Author Bio: This post is by the people behind Morty, the world’s first fully digital and fully automated mortgage platform. Morty gives you one-stop-shop access to many different lenders so you can transparently find the right loan at the best price.