Saving for a new home is unlike any other savings experience. You’re not just filling a bank account and hitting a number. Instead, you’re preparing for what is likely the largest purchase of your life.
In a competitive housing market where bidding wars are common, you’ll want to have every advantage when saving for a downpayment.
Let’s look at ways to shape your saving strategy around what is most likely to succeed. Here are seven essential steps to consider when saving for a home. We’ll use a $250,000 home as an example.
Step 1) Determine Your Price Range
The amount you need to save will be determined by the price of the home you want to buy. Ideally, your savings will be 20% of the home’s listing price plus about 5% extra to cover closing costs and immediate move-in expenses; plan to save about 25% of the home you want to buy.
Suppose you need some help getting a reasonable estimate of your home costs. In that case, there are many resources available to you. Start by looking at the neighborhoods you’re interested in, and the home costs range in those areas. Next, look at the recent selling prices of houses in those areas. Finally, consider whether you want a lower-cost fixer-upper or a higher-priced new construction.
Once you do this research, you will have a clearer picture of what is available and the price ranges for different houses in different areas.
Step 2) Save a Set Amount Every Month
Start saving immediately. Don’t wait to save until the end of the month. Set aside your savings at the beginning of each month or pay period to ensure that saving is a priority. You will also see that number tick up every month, which can encourage and motivate you to save even more. The more you can afford to set aside at the beginning of the month, the faster you will achieve your final goal.
Let’s say you’re saving $62,000 for a $250,000 house.
If you save $1,000 a month, it will take a little over five years to reach your goal.
If you save $2,500 a month, it will take you a little over two years to complete your savings.
Step 3) Pay Off Standing Debts
Take time to clean up and improve your credit score. Removing debt from your budget can free you up to save more and possibly get a lower interest rate. Paying off debts promptly enhances your credit score, which boosts your prospects of buying a home. If you have any small debts floating around, paying them off will improve your credit score and your debt-to-income ratio (click here to learn more about debt-to-income ratio).
A higher credit score and better credit history can empower you to look for lower mortgage interest rates. You may be able to afford more of the things on your wish list for a new home.
Choose the debts to pay strategically. Prioritize smaller debts than are easier to pay off. Bigger loans like car loans or student loans can be a less immediate priority.
If you have any inaccurate charges on your credit report (sometimes called “zombie debt”), be sure to address them and have them removed from your report.
Step 4) Learn About Home Maintenance Expenses
There are three good reasons to learn about home maintenance when saving for your house.
- The first is to understand inspections and any after-purchase improvements a home may need. Knowing what you need to address will help you avoid costly maintenance issues and make the most of your savings. It will also help calculate the savings on fixing up a lower-cost house if that is an option for you.
- The second reason is to lower your expenses while saving for your big home purchase. If you can tackle some DIY projects (Do-It-Yourself), you may save on both utilities and repair services as you save.
- The third reason is to care better for your new house when you buy. Knowing the improvements you want to make and how much they cost will help you calculate your financial needs more accurately.
Expect a home’s annual maintenance costs to equal about 1% of its market value as a rule of thumb. These can include items like appliance maintenance or repairs, weather-proofing, or other minor repairs throughout the year. For example, if your home value is $250,000, expect to plan for $2,500 per year in maintenance costs.
Always get a home inspection to confirm there are no hidden maintenance costs.
Step 5) Put Any Extra Cash Into Savings
If you have any money left at the end of the month, put it into your house savings! Then, reward yourself for saving money by building up your savings even faster. Saving more quickly feels good, but it also accelerates your plan.
Saving more than your monthly goal may also show you that you can afford more than you initially thought. For example, you can reach your goal faster or stay on the same timeline but save for a larger home or one with more of your desired features.
Step 6) Get Used to Your New Predicted Household Finances
Take your mortgage for a test run. If your future mortgage payments, insurance, and property taxes will be higher than your current housing expenses, start adjusting your budget now to get used to what you can expect.
Experiencing your projected incomeneeds and household costs will help you adapt more smoothly later and save faster right now.
Step 7) Sort Out Unnecessary Expenses and Possessions
Finally, reduce your current expenses by optimizing your budget. Clear your online accounts of any subscriptions you don’t use or don’t know that you have.
Think of this as the lead-up to a significant move between homes. Start planning which things you will bring to your new home and what you will sell, donate, or discard.
You can reduce costs and clutter at the same time while making your upcoming move more manageable and more affordable with fewer pounds in the moving truck.
Not all of these steps are necessary for success. But making a plan that you can visualize and measure regularly will make the savings process clearer and possibly more enjoyable. Contact us today to explore your Pop Mortgage options and start making plans!
• The information contained herein is distributed for educational purposes only.
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