As a first-time homebuyer, saving for a home down payment can take a long time, but there are ways to speed up the process. Finding ways to make your money work harder for you may sound like an impossible task, but with some creative thinking and careful planning, it can be done.
And, right now is really the best time to get started with an aggressive home down payment savings plan as many areas of the US are in a Buyer’s Market. This gives you an advantage because there are more homes to choose from and prices may be lower than in a Seller’s Market.
In this article, we’re going to explore every facet of saving for a home down payment so that you can make the smartest choices with your money and get into your dream home as quickly as possible.
How Much Should You Save for a Home Down Payment?
The first thing you need to understand is how much you should actually be saving for a home down payment. A general rule of thumb is to save 20% of the purchase price of the home. So, if you’re looking at a $200,000 home, you’ll need to have $40,000 saved up for the down payment.
Saving 20% has a lot of benefits. For one, it will help you avoid having to pay for private mortgage insurance (PMI). This is insurance that protects the lender in case you default on your loan. It’s an additional cost that’s added to your monthly mortgage payment and can be a real burden, so avoiding it is a big plus.
Another benefit of saving 20% is that you’ll likely qualify for a lower interest rate on your loan. This can save you a lot of money over the life of your loan and make your monthly payments more affordable.
Of course, saving 20% for a down payment isn’t always possible. If you don’t have that much saved up, don’t despair. There are still options available to you. You may be able to get a government-backed loan that requires as little as 3.5% down.
Remember, Down Payment Isn’t Everything
When you’re trying to determine how much to save for a down payment, it’s important to factor in all of the associated costs. In addition to the down payment itself, you’ll also need to have money set aside for things like closing costs, moving expenses, and furnishings for your new home.
A good rule of thumb is to budget an additional 3-5% of the purchase price of your home on top of your down payment to cover these other costs. So, if you’re looking at a $200,000 home, you’ll need to have between $60,000 and $70,000 saved up to cover everything.
Of course, this is just a general guideline. Your actual costs may be more or less depending on the specifics of your situation. To get a better idea of what you will need, speak to an experienced buyer’s agent to guide you through the home buying process!
Ways to Save for a Home Down Payment Faster
Once you know how much you need to save for a home down payment, it’s time to start thinking about ways to speed up the process. Here are a few ideas to get you started:
1. Automate Your Savings
One of the best things you can do to save for a home down payment is to automate your savings. This means setting up a separate savings account and having a certain amount of money transferred from your checking account to your savings account each month.
This method is effective because it takes the guesswork out of saving. You don’t have to worry about whether or not you’ll have enough money left over at the end of the month to save. The money will already be in your savings account, so you can just focus on using it to reach your goal.
2. Get a Side Hustle
If you’re serious about saving for a home down payment, you may want to consider getting a side hustle. A side hustle is simply a way to earn additional income outside of your regular job. This can be anything from freelance writing to dog walking to Uber driving.
The great thing about a side hustle is that it can help you reach your savings goals much faster. You can use the extra money you make to boost your regular savings contributions and get to your goal even quicker.
3. Cut Expenses
If you want to save for a home down payment, you may need to make some sacrifices. One of the best ways to free up some extra cash is to cut expenses. Take a close look at your budget and see where you can cut back. Maybe you can give up your cable TV subscription or start cooking at home more often.
Even small cuts can add up over time and leave you with more money to put towards your down payment. So, if you’re serious about buying a home, it’s worth taking a close look at your budget and seeing where you can make some adjustments.
4. Use a High-Yield Savings Account or CD
Once you start saving for a home down payment, it can be tempting to dip into your savings for other purposes. After all, it’s your money and you can do whatever you want with it, right?
Wrong. If you want to buy a home, it’s important to keep your savings in a separate account and resist the urge to spend it.
But, the key is to put your savings into the right type of account, such as a high-yield savings or CD. These accounts offer significantly higher interest rates than traditional savings accounts, which means your money will grow faster.
One of the best things about these money products is the interest typically compounds daily. And, by laddering CDs, you can take advantage of even higher interest rates.
For example, let’s say you have $10,000 saved up for a down payment and you’re earning 0.25% interest on it in a traditional savings account. After one year, you’ll have earned $25 in interest.
Now, let’s say you’re earning 2% interest on that same $10,000 in a high-yield savings account. After one year, you’ll have earned $200 in interest. That’s a big difference!
If you’re looking for even higher returns, you can ladder CDs to take advantage of higher rates. For example, you could put $2,500 in a 1-year CD paying 2%, $2,500 in a 2-year CD paying 2.5%, and so on. By laddering your CDs, you can earn more interest while still having access to your money if you need it.
5. Cut Down High-Interest Debt
If you have high-interest debt, such as credit card debt, it can be difficult to save for a home down payment. That’s because a large portion of your monthly payments is going towards interest, rather than principal.
One way to speed up your savings is to focus on paying off your high-interest debt. Once you get rid of this debt, you’ll have more money available to put towards your down payment. Additionally, you may be able to qualify for a lower mortgage rate if you have less debt.
6. Finance Your Down Payment
Be careful with this method because you’re essentially “borrowing from Peter to pay Paul.” You’re taking out a loan to come up with your down payment, which doesn’t make a lot of financial sense.
That said, there are some exceptions where this may be a good option. For example, if you’re able to get a low-interest personal loan or you’re able to finance your down payment with a credit card with a 0% introductory APR period, it may make sense to do so.
Just be sure to run the numbers and make sure you can afford the monthly payments before taking on any additional debt.
7. Form a Savings Habit with Biweekly Mortgage Payments
If you’re already planning on buying a home, you can start making biweekly mortgage payments now. This means transferring half of your estimated regular monthly payment every two weeks. The thought process behind it is similar to how aworks.
While this may not seem like a big deal, it can actually help you save a significant amount of money over time. That’s because you’ll end up making 26 half-payments each year, which is the equivalent of 13 full mortgage payments in one year instead of 12 monthly payments.
8. Use a Down Payment Assistance Program
If you’re having trouble saving for a down payment, you may be able to get assistance from a down payment assistance program. These programs are designed to help home buyers with limited resources obtain the financing they need to purchase a home.
Down payment assistance programs can provide anywhere from a few hundred dollars to tens of thousands of dollars. This money can be used towards your down payment and closing costs.
9. Save Your Tax Refund
Another great way to save for a home down payment is to save your tax refund. If you’re expecting a refund this year, put it straight into savings. This is a great way to give your savings a boost and get one step closer to buying a home.
10. Downsize Your Possessions
If you’re serious about buying a home, you may need to downsize your possessions. This means getting rid of anything that you don’t need or use on a regular basis. Not only will this free up some extra space in your home, but it can also help you get money.
When you downsize your possessions, you can sell them online or have a garage sale. Whatever you make from these sales can be used towards your down payment. So, it’s a great way to turn your unwanted items into cash that can be used to buy a home.
This is a very risky strategy, but if done correctly, it could lead to a large return on investment.
If you’re willing to take on some risk, you could invest your money in stocks or cryptocurrency. While there’s no guarantee that you’ll make money, if you do see a return, you could use it towards your down payment. Just be sure to only invest money that you’re comfortable losing.
Talk to an Expert!
If you need help saving for a home down payment, or you’re not sure where to start, talking to an expert can be a great idea. At FastExpert, we can connect you with local real estate agents who can help you through the home buying process.
With FastExpert, you can find and compare the top real estate agents in your area. We’ll also provide you with a list of their qualifications, so you can choose the agent that’s right for you.