One of the key steps to purchasing a home is saving enough money for a down payment. This is a significant amount of cash, so you’ll need to make sure that you save for it wisely. Read on for tips on saving money for a down payment for your next home.
1. Find out how much you’ll need to save
How much money do you need to save for a down payment? The actual amount that will be required will depend on the price of the home as well as on the lender and the type of mortgage.
It’s best to consult a mortgage lender who can advise you on the mortgage amount that you’re qualified for. Generally, though, you should be prepared to fork over at least 20% of the purchase price for a conventional loan so that you can avoid paying for private mortgage insurance.
Active-duty service members or veterans can opt for a VA loan, which doesn’t have a down payment requirement. Qualified buyers can also get a Federal Housing Administration loan for a small 3.5% down payment.
There are many online down payment calculators where you can plug in the dollar value for a down payment, the interest rate percentage, and the number of years it’ll take for you to pay off your mortgage values in order to arrive at a suggested home price and monthly mortgage payment. An online down payment calculator is a good starting point that will help you determine a down payment amount based on your salary and budget. Ideally, your monthly mortgage payment should not be more than 28% of your gross monthly income.
2. Automate your savings
Take advantage of an automated savings account by establishing an automatic transfer from the payroll account where your salary is deposited to the savings account that you’ve earmarked for your down payment. The money will automatically flow from one account to another and you’ll be able to avoid the temptation to spend the money you plan on setting aside for your down payment on something else.
3. Save your windfalls
If you receive a sudden windfall like an unexpected raise or bonus, you may be tempted to treat yourself. But hold that impulse. Rather, save all of the raises and bonuses that you receive. Other periodic windfalls include monetary gifts for occasions like birthdays, hefty commission checks, income-tax refunds, or even money you might make if you sell a personal asset. Deposit all of this money into your dedicated down payment account and watch your savings rise.
4. Refinance existing loans
You may have student debt, or you might still be paying off that new car you bought six months ago. Check to see if your auto and student loans can be refinanced. A lower interest rate can enable you to cut costs when it comes to paying back your loans. If you’ve bought a car and paid it off, don’t buy a new car until you’ve saved enough for your down payment.
5. No amount is too small.
Take advantage of cash reward credit cards, which give you money back when you use them to purchase stuff. No rebate is too small to roll back into your down payment account.
Rather than spending spare change, stash it in your down payment account. If you have a debit card, check to see if your bank will let you sign up for a service that rounds up acquisitions to the nearest dollar and then deposits the difference into a linked bank account. Every little bit counts.
6. Dream big
If you’re a visual person, put up photos of your dream house in a prominent space in your home, such as above your desk or on your refrigerator, so that you’ll be inspired to save every time you see it. You might even want to put a small picture on your credit card, so that you won’t be tempted to use it for unnecessary purchases.
7. Have an emergency fund.
However, you should also be flexible. Unexpected expenses like a sudden hospitalization or a major car repair might occur. You might even run into a bit of bad luck and lose your job.
If you have an emergency fund — and you should — then you won’t need to dip into your down payment account if an unexpected event happens.
For more advice for first-time home buyers in Connecticut as well as answers to other real estate questions, get in touch with us, Kathy Danais at 860.214.1295 and kathydanais(at)gmail(dotted)com and Lisa Gordon at 860.805.7722 and lgordonrealtor(at)gmail(dotted)com. We’ve been helping buyers and sellers in Hartford County for over 15 years and we can’t wait to hear from you.