Do you let out an annoying sigh each time you write your landlord a check? Do you wish you could invest this money in your own property? There are perks to being a renter. You have the freedom to up and leave at the end of your lease, and if anything breaks, you don’t have to pay the cost. But from a long-term financial standpoint, owning a home is better for your pocket. There are no rent increases, plus you can build equity. Maybe you’re ready to take the plunge, but like most people, money is your hold up.
Downpayment requirements can quickly put a stop to your ownership dreams – more so if you don’t prepare for this expense. Some people live in the past and mistakenly believe that they can purchase a home with no downpayment. Sure, some states have zero down programs for first-time homebuyers. However, if you don’t qualify for these programs, or if you’re a repeat buyer, a downpayment is unavoidable. Minimums vary by loan program, with conventional lenders requiring 5% of the purchase price.
If this seems like a stretch and you doubt whether you’ll ever save enough, here are five practical and doable ways to save money for a downpayment on a house.
1. Set your goal.
Saving for a downpayment on a house is all about patience and planning. Understandably, you want your own place sooner rather than later. But the sooner you accept that you’ll have to wait, the sooner you can move on and start preparing.
Ever wonder how a family with modest means can save $20,000 or more for a downpayment? Understand that this doesn’t require a miracle or special skills. First, decide how much you’ll need for a downpayment. This figure depends on your sale price. If you’re planning on buying a home around $200,000, plan to save $10,000. Next, decide when you want to purchase a house. One year? Two years? Three years? Let’s say you decide to purchase a house in two years. Divide $10,000 by 24 months to determine how much you need to save each month to reach your goal. In this case, you’ll need to save at least $417 a month.
2. Decide what expenditures to eliminate.
Now that you know how much to save each month, review your budget and determine expenses to reduce or eliminate. Saving a downpayment for a house requires a lot of sacrifice. This is a huge expense and many families don’t have a lot of disposable income. You can’t eliminate certain expenses, such as rent, but you can modify how much you spend in certain areas.
Maybe you’re spending $300 a month on groceries, $200 a month on transportation, $200 a month on entertainment, and $200 a month on phone and cable services. Can you reduce how much you spend in each category? And what about other routine, yet unnecessary expenses, such as hair appointments, gym memberships and housekeeping services. Can you trim these from your budget? Remember, saving for a downpayment takes sacrifice. It isn’t easy, but it’s worth it.
3. Open a separate savings account
Have a savings account specifically for downpayment funds. Keeping cash for your downpayment in your checking or regular savings is a huge mistake because there’s a greater temptation to spend. Check with online banks, such as Ally, American Express or ING and put your money in a high-yield savings account or a money market account. These accounts aren’t as accessible as your local personal bank, and because withdrawing funds from an online banks can take several days, you might think twice before spending this money. And since online banks pay higher interest rates, you’ll earn more interest on your deposit.
4. Save your tax refund.
Who wouldn’t want to go shopping or take a vacation with their annual tax refund? As a matter of fact, this might be the highlight of your year. But if you act wisely, your tax refund can be the answer to your downpayment woes. Save on a monthly basis as planned, and when you receive your federal or state refund, add this refund to your downpayment fund. This builds your fund faster, and any surplus cash can cover other mortgage-related costs, such as the appraisal and home inspection.
5. Move back home.
If you’ve been on your own for several years, the thought of moving back in with mom and dad might leave a bad taste in your mouth. Consider how badly you want to purchase a home. You can slowly build your downpayment fund over the next two or three years, or move back home for six months and realize this dream faster. With fewer monthly expenses, you’re able to save a larger percentage of your income and drum up your downpayment in record time. Of course, this all depends on whether your folks will open their doors.