For most first-time homebuyers, saving money to buy a house is the hardest part. Knowing how much you need is the first step. Accumulating enough money to use for a down payment is the second; and though it can take years, it is not an impossible task. By making a few adjustments to the way that you are currently spending money, you can set aside funds every month and watch your savings grow until you have as much as you need to buy a house.
There is a big difference between how much you need and how much you should ideally have. If you are going for an FHA loan, you will need to be able to put down at least 3.5 percent of the home’s value; for a traditional mortgage, you will need at least 10 percent; and for the most in cost-savings, you will need to have 20 percent.
This means that if you are looking at a $200,000 house, you will need to save:
Therefore, how much money you need to buy a house will differ according to the type of mortgage you plan to get.
Putting at least 20 percent down on the house gives you many financial advantages. Among them:
Let’s look at an example of these savings. We will return to the $200,000 house and look at three different people purchasing the same house on a 30-year fixed rate mortgage.
As you can see, taking the time to save up the full 20 percent now can save you a lot of money in the future, but it is not required.
Whether your goal is to put down the full 20 percent, or just 3.5 percent, you still need to save up the funds. While many 401(k) plans permit you to borrow against your principal for such things as a down payment, many financial experts, such as Lisa Smith at Investopedia, strongly caution against doing this. “Borrowing from your 401(k) goes against almost every time-tested principal of long-term investing,” writes Smith, who calls this practice short-sighted. You are much better off saving the money up over time.
Also, saving for a down payment can lead to spending and saving habits that can benefit you long after you purchase your home. Homeownership frequently comes with a lot of surprise expenses, so it can bring you peace-of-mind to know that you have funds saved up to handle the costs associated with replacing appliances or making home improvements.
Tip 1: Have a bit of your paycheck put into a savings account
Have you ever noticed that the more money you make, the more you seem to need? People have a tendency to spend more freely when they have more income available to them. If you have direct deposit , your employer may permit you to transfer a portion of your income to a different account. If so, this is great news. Have a percentage of your paycheck, or a set amount, such as $50 or $100, deposited to a savings account on each payday. If you do not have this option available to you, then make it a habit to move this amount of money yourself with each paycheck.
Consider the money in your savings account already spent and avoid the temptation to dip into it. As your available money decreases, your spending is likely to follow suit. Once you have adjusted to this decrease in spendable income, try to deposit more to the savings account each payday. The more you set aside, the faster you will reach your savings goal. If you set aside $250 a month in this way, that will enable you to build $3,000 a year in your savings.
Tip 2: Cut down on cable or satellite TV
Many Americans spend more than $100 each month on cable or satellite TV. Ask yourself how important having hundreds of channels available to you really is. Many of your favorite shows are available online a few days after they air, so if you can handle waiting to see them, you may be able to save a bundle by cutting down on your options, or getting rid of the service altogether. Doing so can easily add another $1,200 to your savings each year.
Tip 3: Limit dining out
If you work outside the home, it may be tempting to eat lunch in your company’s cafeteria or out at a restaurant each day. Packing your lunch can enable you to save about $600 a year. Similarly, cutting down on eating out with friends can save a surprising amount of money. If your friends know that you are saving up for a house, they will understand. You do not need to forgo dining out altogether, just cut down on it. Every time you stay in instead of going out, deposit the $25 or $50 you would have spent into your savings account.
Tip 4: Sell off belongings that you do not need
Look around you. How much of your “stuff” do you actually need, and how much do you actually use? If you have a lot of things you are hanging on to “just in case” or because you just can’t bear to part with them, consider their value if you were to sell them in an online auction or at a flea market. This is not the most popular way to raise money for your down payment, and it is not likely to yield a large sum of money, but it can help you build your savings, while also helping you de-clutter before moving into your new home.
Tip 5: If possible, move into a smaller, less expensive apartment
When you are thinking about buying your first house, the last thing you probably want to do is downgrade your current living conditions. However, if you are able to find a suitable apartment that rents for $100 or $200 less each month, you can put that money directly into your down payment savings account. Cutting your housing expenses by $150 each month will enable you to save an extra $1,800 per year.
Another option, if your pride and your nerves can handle it, is to move back in with your parents while you save up. If you are currently spending $500 per month on rent and can put all of that into savings, you will have an additional $6,000 saved after one year.
Tip 6: Pay attention to where your money is going
You probably know off the top of your head exactly how much money you bring home every month, but do you know where it is all going? It is not a bad idea to pay very close attention to every dollar you spend for a couple months. Find out where you are spending the most money and then try to think of ways to reduce those amounts.
For example, if you are spending a lot on fuel costs, you may want to consider reducing that by taking public transportation, car-pooling, or moving to a less expensive apartment that is closer to where you work. If you are spending a lot on heating or cooling costs, consider how much is wasted when you are not home. Once you see areas where you can save money, allow yourself a budget that is lower than what you have been spending and then put the extra money you save into your savings account. Speaking of budgets…
Tip 6: Make a budget and stick to it
Making a budget is no good unless you actually stick to it. It’s not enough to say “I will limit my grocery spending to $500 per month” but then think “Oh well” every time you exceed that budget. Some people have told me that they spend less on groceries when they take cash, instead of credit cards, to the grocery story. This makes sense since you know exactly how much you can spend and you will be forced to pay attention to exactly how much everything costs when you pick it up. This can lead to your making wiser choices.
Tip 7: Chart your progress and have fun!
Saving money to buy a house does not have to thought of as a chore; with the right attitude, it can actually be fun. You have a goal amount in mind and a plan to get there. If you make a chart of your progress and watch your savings grow, this can be quite a motivator. As you get closer and closer to your goal, your cost-cutting efforts will become easier to live with. Remember, you will be rewarded in the end for your frugal behavior.
Once you have successfully saved up enough money to make a down payment on a house, be sure to continue with your money savings habits. Homeownership often comes with surprise costs, so you can benefit from having a savings account to dip into when necessary. One way you can continue to save money is by purchasing a home insurance policy that is both comprehensive and competitively-priced. Be sure to speak with an independent insurance agent in the Trusted Choice® network for help finding a policy that can save you money both now and in the future.