Another New England winter is just around the corner, and you may be deciding that…
Even though buying a home can be an exciting time, you also have to be practical, and that means saving up for a down payment. Although some mortgage lenders will allow you to finance 100% of your mortgage, having an adequate down payment can mean the difference between paying private mortgage insurance or not, plus it has the added benefit of letting you learn how to manage your finances better. Of course, this leads to the question: how exactly can you save up for a down payment, especially when expenses seem to be on the rise while incomes appear stagnant? Below are six tips you can incorporate into your personal and financial life that will assist you in becoming financially prepared for buying a home:
- Determine your down payment savings goal: Saving for a down payment is a lofty goal, but it is also a vague one. Do you know how much, either in terms of dollars or percentage of the home price, you need to save? Once you create a budget for a down payment, you will. Start by using any free online mortgage calculator to determine roughly how much you may be allowed to borrow. Next, browse through online listings to see the prices of homes are within your affordability bracket. Return to the mortgage calculator to find out how much you need to save for a 20% down payment, as you will avoid paying mortgage insurance with this percentage. If that is not within your range, keep entering new percentages until you find an amount that is doable, and use that as your down payment savings goal target.
- Create a house budget: Do you know how much it costs to own a home? Mortgage payments are only one aspect of it. You still need to pay for your groceries, utilities, clothing, entertainment, gifts, retirement savings, just to name a few common living expenses. The best way to understand if you can truly afford a house that is within your theoretical price range is to create a budget based on the pretense that you already own the home. That means you need to research all of the costs associated with home ownership, such as property taxes, possibly higher utility bills, renovations, repairs, and maintenance tools, in addition to your general life expenses. Be as precise as possible to get the true picture of affordability.
- Role play: Looking at numbers can only take you so far when trying to save for a down payment. What about the actual savings? By taking the numbers in your budget above, determine how much more you will need to pay when you own a home as compared to your current circumstances. Then save that difference. Not only will this allow you to save for your down payment until you reach your target, you will get a better appreciation of how it feels financially to own a home. If you find you are too strapped for cash, browse for more affordable homes and adjust your budget accordingly.
- Take a second look: Owning a home brings with it many obligations, especially in terms of
- finances. To help you find more cash to add to your down payment fund, take yet another look at your budget. How often do you eat out, grab a snack, or meet friends for drinks? Do you engage in retail therapy or indulge in big ticket entertainment? You will find it much easier to meet your savings goal by diverting the money you spend on discretionary spending towards your down payment. Keep in mind you can still have fun without spending a lot. Instead of dinner out, have a potluck night. Go for walks outside instead of at the mall. Learn to cook gourmet meals and take leftovers for lunch. In essence, spend on your needs and be frugal yet creative with your wants.
- May the best price win: There are some aspects of your finances, such as your car insurance, that you must have. However, do you know if you are paying too much? You can reduce some of your fixed expenses by shopping around for better deals or reduced rates. Whatever you save, make sure you place that extra cash in your down payment fund. This same strategy applies to any debt you may have. Ask to refinance at a lower rate or use a balance transfer to save on interest rates temporarily. Again, make sure you pocket those savings.
- Work a side hustle: If you want to save up for a down payment faster or pay off your debts quicker, consider getting part-time or occasional work. You can leverage your existing skills into freelance or consulting work, mow lawns, walk dogs, or take a retail position. What’s more, you will increase your skill set and meet new people.
Saving up for a down payment may appear to be a monumental task, but it doesn’t have to be. With some time, dedication, and number crunching, you can create some concrete financial goals and achieve your home owning dreams sooner than you realize.