So, you've decided that you're ready to buy a house, and have figured out how much money you should spend on a house. Congratulations! Now comes the hard part – saving for a down payment for your house. But, it's so important since it can set you up for financial success down the road (like paying off your mortgage early).
No longer is it easy to get a mortgage with no money down. Most banks want a down payment of at least 5 to 10% (although you can put down as little as 3.5% with an FHA loan). However, if you can save 20% that's best, since you won't have to worry about the extra expense of PMI (Private Mortgage Insurance), which can be costly.
But, how do you actually go about saving that much money? Here are some tips to help you save for a house down payment, including:
- Set a Goal – You've already figured out how much you want to spend on your house, so you can just do the math to figure out how much you need to save for your down payment. For example, if you plan to spend $200,000 on a house and want to have a 20% down payment, you'll need to have $40,000 for your down payment (plus any additional loan and closing costs). Once you have a target, it makes it easier to save.
- Live Below Your Means – If you're renting while you're saving for a down payment, don't rent the best (and most expensive apartment). Go for something less expensive to give you wiggle room to save. Get creative – maybe you can rent a basement apartment or even live with a relative for free. A short term discomfort will put you in a better position financially in the future.
- Cut Your Expenses – If you want to get serious about saving a large chunk of money, you're going to need to either increase your income or cut your expenses (or both). Although it may feel like a huge sacrifice, it's worth it in the long run. Plus, you may find that you really can have lots of fun without spending a dime.
- Keep Your Savings Separate – If you can, set up a separate savings account that is solely for your house down payment savings and decide that you will never touch that money for any other reason than buying a house. You should also have an emergency fund set up to cover any emergencies.
- Transfer Your Savings Automatically – Once you have your budget set, and you know how much money you can definitely save each month, schedule that money to transfer to a savings account automatically each month. If you're able to scrape up more money by cutting your expenses, you can always transfer that money separately.
- Save any Windfall Money – If you get a bonus, gift, tax refund, etc, add any extra money to your down payment savings account. You'll likely not even miss that money since you likely weren't even counting on it.
- Keep Your Savings Liquid – If you plan on buying a house within the next 5 years or so, keep the money in a fixed income account like a money market or savings account. With current interest rates, you'll likely earn very little, but at least you won't lose money either.
- Stay Patient and Focused – You can do it! Don't lose sight of your end goal before you hit it. You want to be patient stay focused on your goal and the end result to help make the sacrifices worth it. Create a visual with your progress (like a thermometer that's slowly filling up) so you can celebrate how far you've come or print a picture of your dream house so you can remember why you're saving. Don't try to skip ahead to the buying part without the saving part…you'll be better off for it in the future.
- Have Fun – The ultimate goal is to own your own home, but make sure you build some splurges into your budget when you hit major milestones along the way. Don't make saving all work and no play (even if the play is free or cheap) or you'll fizzle out before you reach your goal.
How did you save for your house down payment? Were you able to stay patient and focused or did you have your ups and downs?