How to Save for a Down Payment in 3 Steps
How to Save for a Down Payment in 3 StepsOctober 13, 2020
If you are ready to buy your own home, chances are you may have asked yourself, “what is a down payment? How do I save for a down payment? How much should I put down on a home?” While the amount will vary greatly based on each potential homeowner’s situation, there are a few steps you can take to prepare for your big purchase. Explore our guide to help you understand down payments and how to start saving now.
What Is a Home Down Payment?
A down payment is simply an initial payment that you make towards the total cost of a house you plan to buy. You typically pay a percentage of the home’s cost, with the mortgage you get making up the difference. The down payment could be as little as 3% or as much as 20%. However, your financial situation and the type of property you are buying may also play a role in how much money you have to put down to purchase the property.
How much should you put down on a house, though? The good news is that you can often choose how large of a down payment to make – but the decision is not always easy. Some people believe bigger is better, while others prefer to keep down payments as small as possible. Take some time to evaluate the pros and cons of each option and decide which is best for your situation.
Start Saving for a House Now
Saving money for your down payment may seem daunting, especially if you are aiming for close to 20%. Here are three steps to help get you started:
Set a Goal
The first step in the process is to determine a timeline for when you anticipate becoming a homeowner, get an idea of housing prices and start saving accordingly. For example, if homes in the area you are interested in sell for about $300,000, and you would like to buy in five years, making a 20% down payment ($60,000) would mean saving $1,000 a month.
Evaluate Your Finances
Once you have a goal in mind, review your current spending to determine what is a necessary expense and what is not. Where can you tighten your spending? What can you not afford to live without? Do not think of this as giving up what makes your life enjoyable. Instead, think of this as an opportunity to get creative. Try meal prepping instead of eating out or ordering in. Invite friends over for a game night instead of going out on Saturday night. Other ways you can save more money for a down payment include:
- Pay down high-interest debt. Put additional money towards paying off high-interest debt faster so that you can save for a down payment sooner. This also helps improve your credit score, which is one factor lenders look at when you apply for a mortgage loan.
- Skip a resort vacation. Instead of splurging on airfare and accommodations for your next vacation, enjoy some time off exploring popular destinations within driving distance of your home.
- Put aside extra income. Instead of using a work bonus to buy a new TV, put the money towards your down payment.
- Pick up a second job. Earnings from a second job could help you make substantial contributions to your down payment savings.
- Shop around. When was the last time you got a car insurance quote or negotiated a lower rate for your cable or phone bill? Little changes like this could make a significant impact over time.
Create an Ongoing Budget
Once you have assessed your finances, it is time to start tracking your spending. Experts suggest keeping an eye on specific categories like meals out, personal care and entertainment rather than scrutinizing every single purchase. Many apps — like Mint, BillGuard and You Need A Budget — will give you a big picture look at your finances so you can see how you are spending money. You can also choose a budget guideline to follow, such as the 50/30/20 plan, where you allocate:
- 50% of your take-home pay to necessities, such as housing and car payments
- 30% to discretionary spending
- 20% to your financial priorities, like savings and debt
Do not forget to regularly look for opportunities to cut back on "fun” expenses (new clothes, extravagant nights out, new games, etc.) so that you can reallocate money to savings.
Understanding how to save for a down payment is one of the first steps in the homeownership process. Are you ready to start your home buying journey? Explore and compare Perry Homes’ move-in ready properties to find your dream home today!
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How to Save for a Down Payment in 3 Steps