It’s no secret that after a while, renting a home loses its luster. For many of us, it’s a practical necessity that provides us flexibility for paying other expenses, such as student loans, car payments, or the ability to travel. But after a considerable amount of time, it makes more sense to buy a home and stop putting our money towards rent.
If you’ve been looking at the real estate market lately, and want to own your first home by 2020, make it your New Year's resolution to save money for a downpayment.
For those of you who are new to the home buying industry, you might be wondering why it’s so important to save for a house downpayment? Well, this initial payment affects the overall cost of your mortgage and how large of a loan you’ll have to take from the bank.
The general guideline for a house downpayment is putting down 20 percent upfront, so your overall mortgage payments are manageable once you own your home. Plus, you’ll also have to consider closing costs and other expenses in the home buying process, which can add up quickly.
So how are you supposed to save money for a downpayment when you still have other expenses in your life? While the idea of saving money can be a little overwhelming, we have some ideas that will help you save, and keep your New Year’s resolution within reach.
The Four Essential Steps to Saving for a House Down Payment
Be Mindful of Your Debt
Being a first-time homebuyer can be very stressful, because there is a high chance you already have existing debt in your life. Don’t worry - this isn’t going to set you back from buying a home. It’s just something to remain aware of. Before you buy a home, try to pay off those pre-existing debts, or get them to a point where they’re manageable with your future mortgage payment.
Why is this so important? Because the last thing you want to do is enter a financial situation you can’t handle. Trying to pay back any preexisting credit card debt, student loans, auto loans, and other expenses, is going to help you out in the long run.
Paying off these debts in a reasonable amount of time will set you down the road for home buying success, so you don’t have additional loans and expenses to worry about.
Start a Separate Home Savings Account
If you really want to make a difference in your home savings, start off with small goals, like funneling some of your direct deposit away into a home savings account. Transferring a portion of your direct deposit is a good way to start saving money quickly and responsibly. You’ll be less tempted to withdraw this money because it’s going toward your goal of buying a home. Seeing the number rise every month will keep you motivated to keep saving, and let the money grow.
Be Smart About How You Save for A Down Payment
It’s recommended that future homeowners use 20% as a down payment for their home. This way, you’ll have reduced mortgage rates and better long term savings. But if you want to be smart about reaching your savings goals, you also have to manage your personal expenses.
• Cut out financial splurges
If you’re someone who indulges in a gym or yoga membership or gets Starbucks on a frequent basis, it’s time to cut down. Those extra monthly expenses might seem small, but added up together can take quite a chuck out of your financial savings. Be smart with your spending, and remind yourself when you’re missing those extra luxuries that it’s going to be worth it.
• Pause on additional savings
For a brief amount of time, put a hold on funding your 401k retirement plans, or other savings accounts you might have. Funnel the extra cash into your down payment instead, so you can reach your goals sooner. After a few months to a year, you can start allocating those funds again.
While it might be tempting, do not withdraw money from your 401k. You will be hit with additional penalties and high-interest rates. Plus, you want to save that money for when you really need it.
Find More Ways to Save When You Buy a House
Make it a part of your new year’s resolutions to be more practical in all your expenses. If you start applying more practical knowledge to your budget, it’s easier to stash that cash towards your home savings account.
A couple of great ideas that can help you save:
- • Instead of going out to eat, dine in more
- • Plan local trips instead of big vacations
- • Avoid large shopping trips
- • Be more aware of brand names, and get ones that are more cost-effective