Saving money for a house can sound unachievable. You have to stash away tens of thousands of dollars while continuing to pay rent and other expenses. But like any seemingly-insurmountable task, it’s doable if you break it down into smaller parts.
Suppose you need to save $30,000 – a relatively modest down payment. That can seem like more than you’ll ever afford. But what if you broke it down into 24 monthly installments of $1,250? Suddenly it sounds much more reasonable.
Even so, it’s not going to be easy. You’ll need to restrain your spending, and you’ll need to save in a disciplined fashion for a sustained period. We’re about to walk you through the entire savings process, from planning to execution. Let’s get started!
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How To Save Money For A House
Saving for a house is a lot like climbing a mountain. You don’t do it in one big leap. You tackle it one step at a time. By following these five steps, you’ll be able to save for the house of your dreams. Here’s what you need to do:
Set A Savings Goal
Tighten Your Budgeting
Temporarily Hold On Retirement
Gain Another Income Source
Focus On Essentials Only
1. Set A Savings Goal
Before you start saving, you have to know how much money you will need. Otherwise, it will be impossible to come up with a realistic plan! But how do you know how much your mortgage will cost? To find out, ask yourself the following questions:
How much will my new house cost? This answer depends on several factors. Most importantly, it depends on where you’re buying. A house in San Francisco costs much more than an equivalent house in Biloxi, Mississippi. But it also depends on your lifestyle. For example, home prices are higher in the best school districts. That’s well worth the cost if you have kids, but it’s a non-issue if you’re childless. No matter what, don’t take out a mortgage that costs more than 25% of your take-home income.
How much down payment do I need? Once you have a ballpark price for your target home, the next thing to do is to calculate your down payment. There’s no single “right” answer. If you can save up at least 20%, by all means, do so! You won’t have to pay for mortgage insurance. Some loan packages allow for a down payment of as little as 5%, but you’ll have to take out insurance, which will increase your monthly payments. Then again, you can drop your insurance after you own at least 20% equity in your home.
How long will it take to save for my down payment? There’s no right or wrong answer here. A house is a major expense, so it will take at least some time. That said, it’s best to shoot for a time frame of two years or less. Longer than that, and it becomes easy to lose focus. Besides this, you probably have other financial goals you want to take care of!
Where should I save my down payment? Saving for a down payment isn’t a long-term investment. You don’t want to put your cash into the stock market since short-term downturns could cause you to lose value. Your best bet is to put the money into a money market savings account instead. You’ll earn a better return than with a traditional savings account, but you can still withdraw the money quickly when the time comes.
Now you know how much you need to save and where to put it, it’s time to start saving.
2. Tighten Your Budgeting
If you’re like most people, your lifestyle reflects your income. The more you earn, the more you probably spend on meals, subscriptions, and other non-essentials. But no matter who you are, you almost certainly have some opportunities for savings. Here are some ways you can save in the short-term and how much you can expect to save each month:
Cancel your cable: $110
Skip out on restaurant meals: $200
Cancel your gym membership: $60
Switch to generic foods and home goods: $160
Reduce your clothing budget: $100
Add all that up, and you’re looking at $630 per month. Save that cash for two years, and you’ll have a little over $15,000 squirreled away!
Of course, everyone’s budget is different, and the point is to look at any savings opportunities. Remember, this is only temporary. Once you buy your house, you can get back to the gym and reward yourself with a night on the town.
3. Temporarily Hold On Retirement
This might sound like a bizarre tip. Retirement savings are one of your most essential investments since they secure your long-term financial future. In most cases, you should never stop paying towards retirement, even if it means making sacrifices in other areas.
But buying a house is one of the rare exceptions because it’s also an investment in your long-term financial future. When you’re a homeowner, you’ll no longer have to pay a huge chunk of your monthly income in rent. By comparison, property taxes and maintenance are cheap!
Of course, you don’t want to stop investing in your retirement over the long term. If it’s going to take five or six years to save up for your house, you don’t want to put your retirement savings on hold for the duration. But if it’s just for a year or two, the trade-off can be well worth your while.
For example, let’s say you put $600 a month into your retirement fund. Take that same amount and put it into your home-buying fund, and you’ll have $14,400 saved up. That’s a big step towards making your down payment!
That said, you shouldn’t take money out of your retirement fund and put it towards your down payment. You’ll have to pay an early withdrawal penalty and extra taxes. Furthermore, you’ll undermine your retirement account’s long-term growth. Pausing your investments is one thing, and making an early withdrawal is another thing entirely.
4. Gain Another Income Source
If you’re young and just starting out, you might not have enough income. If you can only save a few hundred dollars a month, cutting spending alone isn’t going to get you into a new home. To power up your savings, you’ll need another source of income. Here are some ideas:
Look into gig work like driving for Lyft, Uber, or GrubHub. These services allow you to work on your own schedule so that you can pull in a few extra dollars in your free time.
Consider pet-sitting or house-sitting. These jobs don’t pay a ton, but they’re things you might be able to do without affecting your regular work schedule.
Look into online tutoring. Almost everyone has some level of expertise, and you can earn good money if you have an advanced degree. And English as a second language is always in demand, which is a great opportunity if you’re bilingual.
The nice thing about a side hustle is that it’s all extra money. Suppose you bring in an additional $100 a week after taxes. That’s around $400 a month – or $9,600 after two years of saving!
5. Focus On Essentials Only
We’ve already touched on some basic ways to save money. But if you want to be truly successful, you sometimes need to make sacrifices that hurt – at least in the short term. As you try these tips, keep your eye on the ball and remember what you’re working toward:
Sell some old stuff. Do you have old clothes or electronics to sell? Maybe your grandpa left you a ratchet set you’ll never use. Sell it on Craigslist, Facebook Marketplace, or any other online platform, and put the money into savings. As a bonus, there will be less stuff to move when you finally buy your house
Save your bonus or raise. Do you get an annual bonus or pay increase? Maybe your job pays extra perks if you meet a sales goal or other performance target. Instead of spending this money, put it into your home savings fund. Let’s say you get a raise that works out to an extra $200 per month. After two years, that’s $4,800 in extra cash.
Skip the family vacation. The average American spends $1,558 on a one-week vacation. If you take two vacations annually, that’s $6,000 in savings over two years. If you have a partner, that doubles to $12,000. If you have kids, you could save even more.
Using these methods, you can easily save $10,000 or more in two years. Combine them with the other methods, and you can scrape together a down payment in no time.
Costs To Consider When Saving For A House
So far, we’ve talked about saving up for a down payment. But you’ll have to pay more than just a down payment when you buy a new house. Don’t panic, though. The other costs are relatively small:
Closing costs. Closing costs include the cost of paying the buyer’s and seller’s agent fees, as well as loan origination fees, under
Moving expenses. This can be dirt cheap or very expensive depending on how much stuff you own and how far you’re moving. If you’re just moving across town and have a few friends to help, you can get the move done for just a few hundred dollars. On the other hand, a cross-country move with a professional mover can cost as much as $10,000 or more. So before you buy, make sure you’ve done your research and know you can afford the move.
Sometimes you can get lucky, and the seller will pay for the closing costs. This isn’t the norm, though, and it generally only happens when they need to move immediately. Either that or something went wrong during the inspection, and they’re willing to compensate you by paying the fees.
Should You Pay Off Debt Or Save For A Down Payment?
Yes. To begin with, a mortgage is yet another form of debt, and it’s good debt, but it still represents a non-optional monthly payment. For another thing, having too much debt can make it hard to get approved for a low rate.
Most importantly, debt is often the number one obstacle to home ownership. Credit card payments, student debt, and car loans are actively making you poor. Pay them off quickly, and you won’t just get rid of the monthly bill – you’ll also save money on interest payments, all of which can go towards your first home.
It’s also wise to save up an emergency fund of at least three to six months of living expenses. That way, if you become injured or lose your job, you’ll be able to make your mortgage payments. You can also dip into this fund if your home needs an emergency repair like a new furnace.
This might mean putting your plans for a new home on the back burner. But in the long run, you’ll be in better financial shape. Without debt, you may even be able to save up a down payment faster.
How To Save For A House: Frequently Asked Questions
Buying your home for the first time can be confusing, and you probably have some questions. Some of the most common are:
How Can I Save for a House Quickly?/p>
How Do I Budget for A House?
When Should I Start Saving For A House?
Can I Buy A House With No Down Payment?
How Can I Save For A House Fast?
To save for a house as quickly as possible, you need to look for multiple ways to save money. Stash away your bonuses and raises, and cut your expenses to the bone. Skip your yearly vacation, and take on a side hustle like rideshare driving.
It also helps to pay off your debts first so that you won’t have as many expenses on your plate.
How Do I Budget for A House?
Houses might be expensive, but budgeting for one is pretty straightforward. First, you need to know approximately how much your house will cost. Some basic research on a site like Zillow will give you a good ballpark number.
Next, calculate 20% of that number as your down payment. You can always pay less if you’re willing to take out mortgage insurance, but it will cost more in the long run. Add another 3% to 4% to cover closing costs, just to be sure.
For example, suppose you’re targeting a $200,000 home. 20% of $200,000 is $40,000, and 4% is another $8,000, for a total of $48,000.
Next, set a timetable and figure out how much you’ll need to put aside each month. Using our example of a $48,000 budget, it would take $2,000 a month in savings over two years to save up the money. After that comes the hard part: saving and sacrificing to put that cash away.
When Should I Start Saving For A House?
You should start saving for a house when you think you’re ready to become a homeowner. Ideally, you should be out of debt with a three- to six-month emergency fund already set up. At that point, you’ll need to do your research and find out how much you need to save.
Don’t wait any longer than necessary, though. The longer you delay, the more time it will take to buy your first house.
Can I Buy A House With No Down Payment?
Yes, you can. VA loans can provide no-money-down mortgages to veterans, and rural Americans can take advantage of zero-down payment USDA loans. For others, you’ll have to find a lender that offers a no-money-down loan package. You’ll need a better credit rating than you otherwise would, and your interest rates will be higher. But it’s a viable option if you can’t afford to save for a down payment.
Saving up for a new house can be expensive, but it’s not an insurmountable challenge. By taking things one step at a time, you can slowly squirrel away enough cash to become a homeowner. Before you know it, you’ll be closing on your new house and relaxing in your new living room.
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