The costs to buy a new home quickly add up. Despite all the costs associated with buying a home, the largest cost you’ll have when you buy a home is often your down payment, which is a percentage of the purchase price that you pay out of pocket.
A down payment is at least a few thousand dollars, meaning it’s important to start saving well before you’re ready to buy a home. Keep reading to learn how much you should save for your down payment, tips to help you save, and more.
Tips for Saving For A Down Payment: Looking at the number required for your down payment can quickly make you feel disheartened. Here we have some tips to help make your homeownership goal more attainable. Your dream home isn’t as far away as you may think:
1. Determine Your Savings Goal
The most important thing is to establish a down payment goal. Once you have a plan you can set yearly, monthly, even weekly goals to get to your goal. If you don’t know what your savings goal should be, consider how much home you want to buy and then go from there. According to this article from Rocket Mortgage, the average down payment is 6% of your purchase price. This is a great place to start.
2. Create A Budget
Alongside your down payment goal, you’ll set a budget for how much you want to save per month to hit that goal. Write down all your monthly expenses and see if there are any you can cut out. Write down your monthly income and then see what the difference is. Decide how much of that you want to save in order to start putting away money for your new home.
3. Open A Separate Savings Account
When you start saving for your down payment, open a new savings account to keep the money separate. We often even recommend opening this account at a different bank or credit union so you don’t have easy access to the money in it. Often you can find online financial institutions that offer high-yield savings accounts that allow you to earn significantly more money on your savings than a traditional bank. While you won’t get stock market returns on the money, you’ll earn a bit of extra money to help you reach your goal.
4. Automate Your Savings
You have to make it a priority to “pay yourself first.” This can actually be automated by setting up an auto transfer every time you get paid. By setting up these automatic transfers, you can set it and forget it. Even in the months you don’t feel like saving or aren’t feeling motivated by your goals, because it’s automated it will still keep you on pace to hit your goals.
5. Pay Down Debt
It may seem counterintuitive to pay down debt while you’re trying to build up your savings. It’s true that prioritizing debt will push your savings goals back a bit, but it will also help to reduce your debt-to-income ratio. Once you have paid off your debt, you can take that money and put it directly toward your savings.
6. Cut Extra Spending Costs
We mentioned before to look at your budget and see if there are opportunities to cut out unnecessary expenses. Chances are, you have a few areas in your budget where you can afford to cut back. Maybe you set aside money every month for travel, rec leagues, or for other expenses. You could temporarily suspend these expenses to buy a home faster. Once you save your full down payment, you can go back to business as usual.
7. Increase Your Income By Getting A Side Hustle
There is a point where you just can’t cut back your spending anymore. At that point, you will need to increase your income to save more. Maybe you are at the ceiling with your full-time job. Consider a side hustle like ride-sharing, grocery delivery, dog walking, or any of the other opportunities the gig economy offers.
8. Use Windfall And Unexpected Profits
There may be opportunities throughout the year to add to your savings with bigger chunks of money. You may get tax returns each year or like during the pandemic, the government provided economic impact payments (aka stimulus checks).
Another example of a windfall happens for people who are paid biweekly. If you get a bi-weekly paychecks, then twice a year, you’ll get three paychecks in a month instead of the normal two. You can add that paycheck straight to your savings fund.
9. Find Down Payment Assistance
There are many opportunities available for down payment assistance that can pay for some or all of your down payment. Some of these programs are grants, while others are loans you’ll have to pay back eventually. The requirements for down payment assistance varies from state to state and even sometimes your county. Some programs have credit and income restrictions that you’ll have to meet to qualify. But if you’re eligible, these programs can save you years of time that you would spend saving for your down payment.
Bottom Line: Budget Carefully, Watch Your Spending, And Look For Opportunities to Add More Money When Saving For A Down Payment
For most, a home is the largest purchase they’ll make in their lives. Which means the down payment is the first large financial hurdle, often requiring borrowers to save tens of thousands of dollars. Following the steps in this guide can really help you to get started on the path to getting into that dream home.