How to Save for a House: Everything You Need to Know to Get a Down Payment
By: Rita Cunha | October 23rd, 2020
When you’re looking to buy a new home, there’s one thing you will absolutely need: enough money for a down payment. For most people, coming up with a sizeable down payment to set aside is easier said than done. You likely won’t come up with that kind of hard cash just with a side hustle. You’ll have to budget, save, and invest.
Today, we’re walking you through the essentials on how to save for a house. We’re talking interest rates, unexpected fees, and how to get your personal finance in order. Homeownership may not be cheap—but it’s well worth the effort and the sacrifices.
How Much Money Should You Save Up for a House?
Everyone’s financial situation is different. Thus, how much money one spends on a down payment will depend from person to person. The best way of knowing how much to put aside is to sit down with your mortgage lender and talk about it.
There are so many things that will need to be factored in. What’s your credit score like? How much collateral can you put up with a lender? Do you have a comfortable savings account? How steady is your income? It all works on a case-by-case basis.
However, we’re seeing some patterns in the real estate industry. In today’s market, you can expect to pay 20% of the asking price of your dream home as a down payment. That’s not a strict requirement; in fact, the minimum accepted down payment is “just” 5%. But the more you put down, the better mortgage rates you’ll get and the better-priced houses will be available to you for purchase.
Costs to Consider When Buying a House
Don’t be fooled; the purchase price for a home isn’t all you’ll be expected to pay. On top of a down payment, there are closing costs to factor into your budget. These can add 5% (or more) on top of the home price, which often translates to thousands of more dollars. Let’s break them down.
Mortgage Principal and Interest
Unless you have wads of cash lying around, you’ll have to make monthly payments to your mortgage lender. These will include the principal (the amount you borrowed) plus some interest. Today, we’re seeing a mortgage interest rate of between 3% and 5% for a 30-year loan. Of course, how much interest you’ll pay will depend on the bank you do business with and on your borrower profile.
Real Estate Taxes
On top of that, you’ll also be paying property taxes. These can vary greatly depending on where you live, but with home buying, there are always real estate taxes. Don’t forget to budget accordingly.
Homeowners’ Association Fees
Additionally, you may also have to pay dues to your local homeowners’ association. HOA fees can be tricky since they can run in the thousands every month if you live in an upscale community.
Private mortgage insurance (PMI) should also be included in closing costs. Some lenders will only give you money if you buy this type of policy, which will act as a warranty against defaulting on your payment.
Lastly, you can also purchase homeowners insurance to keep your investment safe from natural disasters. If you live on a hurricane path, for instance, this policy can be incredibly useful.
What Type of Loan Can You Get?
The days of one-size-fits-all mortgages are long gone. Now, you have a lot more freedom to choose the loan that best fits your needs. For instance, banks can now tailor a loan for a first-time home buyer.
While we can’t tell you which type of loan is best for you, we can tell you what the most popular options available are:
- Fixed-rate loans: Best for buyers not looking to move anytime soon.
- Adjustable-rate loans: Best for buyers with a lower credit score.
- Federal Housing Administration (FHA) loans: Best for buyers that don’t have a lot of money to put toward a down payment.
- Veteran Affairs loans: Best for former military personnel, looking for security and stability.
- USDA loans: Best for struggling buyers in rural areas.
- Bridge loans: Best for buyers looking to sell one house and buy another.
Why It’s Worth Saving for a Down Payment
Unfortunately, it’s just not realistic to buy a house with no down payment. Even putting down a relatively low deposit of 5% will make it hard for you to secure a home.
That’s because, in today’s tight real estate market, mortgage lenders are very careful of who they lend money to. If you don’t put down a large chunk up front, they will probably not want to give you a loan. Or, even if they do, that loan will likely have high-interest mortgage rates tied into it.
The best you can do is save as much as possible to pay for a sizeable down payment. It will guarantee you get the best rates available, as well as qualify to buy the better-priced homes. It’s definitely an investment that pays off.
Can I Buy a House with 10K?
If $10.000 is all you have for your down payment savings, all may not be lost. If you have a stellar credit report and are looking to buy a home in an affordable price range, you might just be able to find something. Talk to your lender about what mortgage payment options are available to you. You may qualify for a government-backed mortgage like the FHA loans.
But if you’re looking to buy a house in an expensive city (say, New York) and don’t have much financial credibility, you might not have too much luck.
3 Easy Steps to Start Saving and Budgeting
Saving for a good down payment is not an easy feat. The best way of squirreling away enough money is to set savings goals and actively working to achieve them.
1) Define a Clear Timeframe
While it only takes an average of 60 days to buy a house, the process of saving for a down payment can take years. Before rushing into viewing homes in your dream neighborhood, you have to sit down and set a clear timeframe for your purchase. What year do you want to buy a house?
Think of how many financial obligations you have. Do you have a good credit report? Do you have debt on your credit cards to pay? How is your emergency fund looking? Are you still paying off student loans?
All those things matter. Once you have a plan to tackle them, you can start budgeting for buying a home.
2) Set a Realistic Budget
Now comes the not-so-fun part: taking a hard look at your finances. How much extra money can you put toward savings? Are you in a position to give up some of your expenses to save a larger chunk of your income? The more you save, the better the deal you’ll get.
But it’s also useful to have a specific savings goal number in mind. How much will you need to save to cover a 20% down payment? To know that, you can use a mortgage calculator for free to play around with interest rates and house prices. We’ve put one to the test.
Let’s say you want to buy a $300 000 home in Denver, Colorado. You’ll need $60 000 to put down 20% upfront. Then, with a mortgage loan rate of 3.05% on a conventional loan, you’ll pay $1518 every month. That includes HOA fees ($250 per month), home insurance ($100 per month), real estate taxes ($150 per month), and no PMI.
Since you should only spend 30% of your income on housing, you would need to make at least $5060 per month. If you make that much, you can go ahead and set $60 000 as your savings goal. If you want to buy a home in 5 years, you’ll need to save $12,000 every year (or $1000 per month).
See how the math works? Use an online monthly mortgage payment calculator to adjust this number to your situation.
3) Invest Your Money Wisely
Once you know how much to save, it’s time to build your down payment fund. Fortunately, there are many different ways of doing it. Here are just the top three:
- Cutting back on unnecessary expenses, freeing up money in your checking account.
- Moving money you have already saved into a high-yield savings account or money market account.
- Buying a Certificate of Deposit for a five-year period (and not touching that money until it has fully matured).
Sure, none of these tactics will make your fund balloon in the short-term, but you stand next to no risk of losing your money. While you may think that it will be faster to save money by investing in higher-risk products, you could lose everything in the process.
To get you closer to your savings goal, you can also withdraw up to $10,000 from an existing IRA account without getting a penalty. Additionally, you should also be taking advantage of windfalls (such as tax refunds, bonuses, cash gifts, or selling valuable personal assets).
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