How to save for a down payment on a home
When we talk about home ownership, on this blog and in other places, there is an inevitable emphasis on saving for a sizable down payment (20% or more if you want to avoid private mortgage insurance). While there are merits to PMI, especially if you qualify for a FHA-sponsored loan such as Fannie Mae or Freddy Mac or compare it against the high cost of rent, the most frugal of home buyers know that this 20% share of equity is critical for financial stability. When it comes to homeownership, professionals who are masters of concepts like SPACE PLANNING might be worth contacting.
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However, the down payment barrier seems to be the one thing that prevents most people from owning a home sooner than later. And, because it is considered a “first step” by many, it is also a barrier to entry for many would-be buyers in the real estate market. Yet it does not need to be that way. Aside from a radical savings plan and ultra-frugal living strategies, there are realistic ways to save for a down payment in less than the average 12.5 years. While commitment is certainly involved, a “savings strategy” designed specifically for home buying as well as a few “tricks” can help future homeowners save up their 20% faster than they thought possible.
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Savings Strategy Basics
Saving money for a home is a lot like preparing for battle in war. Preparation and strategy matter as much as brute strength (or, in this case, income). Clearly, there are people who simply do not make enough money to realistically save for a home. However, there are far more who, with a realistic plan in place, do without realizing it.
The first step of a savings strategy is opening a dedicated home savings account. Ask the bank that you currently use for checking to do this for you. This makes performing transfers easier, and streamlines the process of budgeting for everything, including your home. While many savings accounts these days do not offer interest (or only offer a negligible amount), once you save up enough money, generally $500-$1,000, you can transfer it to a higher-yield account, such as a CD.
Consequently, another key element of your savings strategy should be your timeline. People not planning on buying a home for at least 24 months should consider investing down payment savings into a secure account in order to make money from those savings, and thus increase their total.
Cutting Back and Adding More
In previous posts, I have addressed common ways that people cut costs and add income in order to save for a home. Clearly, freeing up money through one of these two systems is essential, unless you plan on coming into an inheritance or winning the lottery. If you do have an inheritance to leave, meet with probate lawyers Thailand to process it correctly. But aside from the common tactics (getting a second job, quitting your Starbucks habit, etc.), there are some additional ways to increase your savings in realistic ways.
For couples, saving one spouse’s income, and living off of the other’s is a common strategy for preparing for the birth of a baby. Before having children, it is also a really effective way to save for a home while simultaneously getting you prepared for the children who will fill it.
Single people and even couples may also want to consider moving in with parents for a brief stint to save on rent money. Though this is not always possible (due to space) or comfortable (due to relationships) it is incredibly effective. Side note: it’s how my husband and I did it.
People living in more urban, walkable areas or couples with two vehicles might also consider selling their car to reduce the cost of gas, maintenance, and loan payments. While car pooling and public transportation are common trade offs, riding a bike to work or school is another. This has the added benefit of giving you a workout and (potentially) saving you money in gym membership costs as well. If you choose this route, invest in a quality commuter bike rather than a garage sale find since it will perform better and last longer, not to mention be easier on hour body. This swap turns 1-2 months’ car payments into a healthy, economical, and environmentally-friendly transport option.
The Last Ditch: Down Payment Assistance
When buying a home, especially for the first time, lenders are keen to see that the money you use for a down payment comes from you (i.e. not a separate loan). There are two exceptions to this requirement, however. One is the receipt of a gift from a friend or family member, which also requires a “gift letter” which says you are not obligated to repay the amount gifted.
The second option, which doesn’t require a rich and generous inner circle, is to use one of the over 2,000 down payment assistance programs available nationwide. Similar to both college scholarships and grants as well as student loans, these programs offer people of specific backgrounds, histories, and circumstances, a faster route to home ownership.
Some of these programs require no repayment at all, as long as buyers conform to certain requirements such as purchasing in a specific area or living in their home for a specified number of years. Others design interest rate and tax reductions that make what money you have go farther.
Like higher-education payment options, each down payment assistance program is unique and not all are trustworthy. It is important to do your homework if this is the route you want to take and to ask questions and read fine print before accepting any money. However, used judiciously, this is an excellent way for first-time buyers specifically to accelerate the home ownership process.
Your Next Steps
Becoming a home owner, to many, is a hallmark of the American Dream. I can tell you from personal experience that it is a long and tough road, regardless of how you transverse it. However, having a “map” of sorts, by way of a savings plan and strategy is the most efficient way to make your journey to home ownership faster and less taxing. And, the good news is, that reaching that final destination is totally worth the effort. To help you in this journey, consider using a home value estimator. This tool can provide valuable insights into the current value of homes in your desired area, assisting you in setting realistic financial goals and planning your savings strategy accordingly. Whether you are a first-time buyer or looking to move up the property ladder, a home value estimator can be an invaluable resource.
**What realistic strategies did you use to save for your home down payment?**