The Best Way to Save Money for a House
If you are looking to buy a home, you need to start saving money for a house. The money you are saving will go toward a down payment. A down payment is the cash that you bring to the closing table when buying your home. While you can borrow money from the bank in the form of a mortgage or home loan, a portion of the money comes directly from you.
The down payment and the money you save for the home are insurance for the lender. When you are handing over money from your own account, you are invested. This means you are more likely to make good on your mortgage payments each month and the bank will like working with you.
Saving up money for a down payment not only makes you look good to the lender but it also puts your mind at ease. A large down payment can reduce your monthly house payment and allow you to get a shorter mortgage term so you can be out of debt faster.
How Much Do You Need To Save For a House?
When you go to save money for a house, you should have a number in mind. Work through this process to determine your magic number.
1. Determine How Much You Can Afford Each Month
You don’t want to spend more than 25% of your take-home pay on a mortgage. If you put too much into your payment then you will be unprepared when it comes to emergencies.
This number should also include insurance, taxes, escrow, and homeowner association fees if you have them. Make sure you have a solid budget and this will help you determine how much you can leave aside for your future house.
2. Use a Monthly Mortgage Payment Calculator
Using the calculator will allow you to arrive at your total mortgage amount. Spend some time on the mortgage calculator. While it’s recommended to choose a 15-year fixed rate, it’s not always possible. You can input different numbers into the home value and down payment section with the goal of hitting your total monthly payment. Talk over your options with your spouse or a trusted family member.
3. Aim for a 10% to 20% Down Payment
This way, you’ll have an idea of what your total home will cost and your budget. The best advice is to save this much for a down payment. Ideally, you would put down 20% so you can avoid having to pay for private mortgage insurance.
Of course, the number can always change, especially if your life circumstances change, but the best way to actually save is to have a solid idea in your mind and plan according to that.
Where To Save Money For a House
Since the money you are saving for a down payment has a definite purpose and will need to be reached in a specific timeline you shouldn’t save the money in something risky, such as investments. Instead, you should save the money in something more boring, such as a CD or a regular savings account.
While you may be able to earn more money by investing your down payment in some high-risk vehicles, there is the real risk that you will lose money. The worst-case scenario with investing this money isn’t missing out on returns but instead losing some of the money you need to buy a house.
What Costs Should You Consider When Saving For a Down Payment?
When you go to close on your home, you are going to be paying more than the down payment. You will also have to pay for other fees. Don’t be shocked by these fees and start saving for them while you save for your down payment.
Private Mortgage Insurance
You will only have to pay private mortgage insurance if you are putting less than 20% down for your home. If you are able to save enough money then you can avoid this.
Inspection and Appraisal Fees
If you want the lender to sign off on your mortgage then you will need to have the home inspected and appraised. These items can cost about $300 on average.
Closing Costs
There is a lot of work that goes into a loan when you sign on the dotted line. Unless the seller has agreed to pay the closing costs, you will be responsible for about 3% to 5% of the total mortgage value for closing costs.
How To Start Saving Money
When it comes to how to start saving money, there are a number of things you can do in order to save money for a house.
Get Debt Under Control
When you have a lot of debt, it can make it harder to save for a home since a big chunk of your income is going toward your monthly bill payments. A high debt load can also make it more challenging to qualify for a mortgage. If you have debt, do what you can to pay it off and reduce it. If part of your debt is student loans with high-interest rates then consider refinancing them to lower the payments. If you have credit card debt with a high-interest rate then pay off as much as you can and consider a balance transfer to a lower-interest card.
Put Retirement Savings on Hold
This can be a controversial tip and not something you should do if you are close to retirement. If you are young and are currently actively contributing to a retirement account then you can divert some of that money to a down payment. This should only be a short-term plan but it can make a difference in how much you are able to save and how fast.
Make Room in Your Budget
Since you need to save a lot you have to make room in your budget for this. This could mean you need to get some additional income, trim back expenses, or both. When you start to make room in the budget for the money you need for your home, it also starts to prepare you for managing the tighter budget that homeownership needs.
Set up an Automated Savings Plan
When it comes to how to save money each month, most people aren’t savers by nature so it’s easier to automate the savings process. Allocate a certain percentage or dollar amount of your regular paycheck to go into a savings account dedicated to your down payment. This makes the process automatic so you won’t forget to do it and also makes it invisible. Money goes from your check to your savings account without you even seeing it. This removes the ability and temptation for you to spend the money.
Use Other Technology
Besides setting up an automated savings plan, you can use other technology to automate. There are apps that will round up your purchases to the nearest dollar and then put the difference into a savings account for you. Spare change can add up quickly.
Ask for Gift Money
When family members ask what you want for a holiday or birthday present, tell them that you would like gift money to put toward a down payment on a home. Some of your family members may enjoy the fact that they are helping you with this dream.
Bank Any Windfalls
You can make the process of saving money for your home easier if you start to bank any periodic windfalls you get. These can include your tax returns, bonuses, large commission checks, gifts received, or even the sale of personal assets. When you deposit these funds into a savings account, you speed up the process of growing your fund. Regularly depositing extra money chops off the number of years it takes to save.
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Build in Some Flexibility
No matter how much you are saving up for a home, you also need to build in flexibility to your savings plan. While saving, there will still be some demands on your finances. This can include uncovered medical expenses or car repairs. These problems shouldn’t stop you from your goal to save money but you will have to be ready when they happen. Make sure you have an emergency fund and keep it stocked. If you already know you have predictable expenses then you also need to prepare for those expenses as well.
Ways To Earn More To Save Money For a House
When you need to save money for a house, saving may only take you so far and earning more money can kick start your home purchase.
Change Jobs
You can ask for a raise at your current job but it likely won’t be much. If you want to earn more money, you may need to change jobs. Spruce up your resume and start looking around. You don’t want to just do this until you have your down payment. Instead, you should always be on the lookout for a better-paying opportunity. When you apply for a mortgage, the lender will look at your job history and income so don’t just job hop unless it’s worth it.
Start a Side Hustle
Staring a side hustle can give you some more flexibility. Some people think of side hustles as just online projects and while you can make money online, you can also make money doing other tasks. Start driving for Uber or Lyft or do random task work through Task Rabbit. You can also give music lessons or babysit. A side hustle doesn’t have to be formal and it can be just a way to get some extra money for your home purchase while you have some spare time.
Work a Second Job
Working a second job while you save up for a down payment doesn’t need to be forever. It can be an evening gig, weekend job, or just around the holidays for a few weeks in order to help you save up some extra money. Remember, every little bit helps.
Sell Unwanted Stuff
Sell your unwanted stuff now to put money into your down payment. This way, you are getting rid of unwanted things that you won’t have to move into your new home. The less stuff you have, the less you have to pay the movers to move it.
How To Lower Your Big Expenses To Save Money For a House
If you want to save money for a house, you know that you need to make room in your budget. It may feel like your budget is already tight but there are ways to lower your expenses so you can have some more room in your budget. Yes, you can cut back on buying expensive lattes every day but it won't have as much of an impact as avoiding big-ticket items.
Housing
Housing is the biggest expense for nearly everyone. It is you that can downgrade to a smaller place or a less desirable neighborhood, so think about it. If you suck it up for a year then you will save so much money and with all that saved money, you will be able to live in the house of your choosing. Don’t move too far away from work since the extra savings could cut into commute costs. A two-hour daily commute won’t be a great way to live, even if it is saving you money. If you aren’t able to move, try renting out part of your current place or get a roommate to help with this expense.
Transportation
In some locations, you need to have a car if you hope to get around. However, you may not have to drive everywhere. Make a list of the car trips you take in a week. There may be some trips you can cut out by biking or walking or be more strategic about your day and combine errands so you have fewer trips. If you are lucky to live in an area with great public transportation then you may even want to get rid of your car and use the money toward your down payment.
Live on One Income
Many people make one income work after having a child but you can do it to save for a house. Of course, your partner isn’t quitting his or her job but you figure out how to live on one income and then put the rest in a savings account for the home.
Lower the Small Expenses
The small expenses still matter but they won’t have the same impact as moving to a cheaper place. Keep in mind that the small expenses really do add up so if you are serious about buying a home, consider getting rid of the small expenses too.
Ways You May Have Not Thought Of To Save Money For a House
If you are looking for extra ways to save money for a house, there are some things you may have not thought of.
Use Cash as Much as Possible
Using cash can seem like a hassle but it can save you money. Studies show people spend more money when using credit cards so not only will you spend less on the items you need but you can avoid frivolous impulse buys.
Be Flexible with Your Grocery List
When saving money, being flexible is key. For example, you may really like a certain brand but if there is a sale on a generic brand, go with that. The same goes for meals. If you see a sale, swap out the meal you had planned and go with the discounted food to make a cheaper meal. This can allow you to be more creative and still save money at the same time.
Make a Calendar of Things You Aren’t Going to Do
Many people will plan events on the calendar but usually, these events mean spending money. Instead, make a calendar of things you could do but won’t. For example, write down "not having dinner with friends at that new bar on Saturday." Then calculate the amount of money you are saving by not doing those things.
This can sound kind of cheesy but a hard part of saving money is filling the time you would typically spend on entertainment. If you prefer, you can also turn the process into a game and then you will actually be entertained while saving money.
Conclusion
In order to save money for a house, you first need to determine how much you can spend and how much you are going to need. Remember that when you save money for a house, you are saving for more than a down payment and need some money for closing costs.
There are a number of things you can do to start saving and jumpstart the process. Cutting down on big expenses in your budget can really make a difference and finding ways to make some extra money also helps. In the end, remember the sacrifices you are making are worth it for your dream of homeownership.