How to Save Money for a House Down Payment and Closing Costs

How to Save Money for a House Down Payment and Closing Costs

2. Get your debt under control

Carrying a lot of debt makes it more difficult to save for a house, since a chunk of your income goes toward repayments. That debt load can also make it more difficult to qualify for a mortgage. If you have debt, do whatever you can to reduce it. If you have student loans with high interest rates, consider refinancing them to lower your payments. If you have high-interest credit card debt, pay off as much as you can and consider transferring your balance to a low-interest card.

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19. Unsubscribe From Tempting Email Lists

Saving money for a house is a difficult task in and of itself. Throw in a few daily emails from your favorite retail stores, and it gets significantly harder.

That’s why, if you want to save for a home as fast as possible, you should unsubscribe from the email lists that are most likely to tempt you into spending money.

You see, I’m a firm believer that one of the best ways to resist the temptation to spend money, is to reduce or eliminate your contact with the stores that tempt you the most. And unsubscribing from their email lists is one of the most efficient ways to accomplish that.

Trust me, your home savings will thank you for this one.

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17. Cook your own meals

Food can be a large expense in your budget. Prep for your upcoming meals and have a clear understanding of what you need from the grocery store. Make a list, look for coupons, and try not to buy anything that didn’t make it on the list.

Even without coupons, buying food at a grocery store will be significantly less expensive than ordering carryout or eating at restaurants.

10. Re-evaluate your recurring bills

Look at your cable, satellite or streaming options to potentially save money. You might start off with a good deal from your cable or satellite provider which lapses after an initial period. Finding a new deal after a couple of years could save you money.

Is It Better to Pay Off Debt or Save for a Down Payment?

If you have any debt, hands down the smartest thing you can do is pay it off before saving for a down payment. Why? Because the biggest expenses that get in the way of people saving for a home purchase are all debt related: student loans (51%), credit card debt (45%) and car loans (38%).4 The absolute best way to free up your income for savings is to pay off debt as fast as possible!

Then, go one step further and stash away three to six months’ worth of your expenses as a full emergency fund. Last year, homeowners had to spend $1,640 on emergency home projects.5 Imagine coughing up the cost of that emergency on top of losing a job and still trying to pay your mortgage—no thanks! An emergency fund saves you from all that.

Sure, it might feel like a bummer to hit pause on the excitement of saving for a home and replace it with the dullness of paying off debt and building up an emergency fund. But trust us, doing this will help you save your down payment faster—and protect you from a lifetime of stress.

6. Determine a monthly or per paycheck savings amount

Take your goal purchase date and work backwards to find your savings rate. For example, if you want to buy a $400,000 home in five years and your goal down payment is 20% — that’s $80,000, plus $8,000 estimated for closing costs.

To save a total of $88,000 over the next five years, you would need to put away roughly $1,466 each month, or about $733 per paycheck if you’re paid bimonthly ($88,000/24 paychecks/5 years).

Perhaps you’re expecting a windfall or plan to put your annual bonus or even a tax refund toward this savings fund. In that case, estimate the annual lump sum you’re going to save and subtract that from your total savings goal before calculating how much you’ll need to save per month or per paycheck.

21. Use The 30-Day Rule

The 30-day rule is a pretty simple and effective money-saving hack. If you’re unfamiliar with it, allow me to explain.

Whenever you want to buy something that you didn’t originally plan into your budget, you have to hold off on buying it for 30 days. This gap in time will allow the excitement and emotion of the purchase to wear off, which will help you assess, with a clear head, whether or not you truly want it.

Additionally, in most cases, if you still want to make the purchase after 30 days, you can just incorporate it into the following month’s budget. That way, you can figure out other areas of your budget to cut so that the purchase won’t have as big of an effect on your home savings goal.

In my personal opinion, the 30-day rule is one of the best financial tips out there. And when you’re saving for a house, it can make a really positive impact.

Downsize big-ticket lifestyle expenses

Scaling back subscriptions and shopping around for discounts on essential monthly costs are all part of an even bigger task when saving for a home purchase—and that task can be summed up as downsizing or living below your means.

"Downsizing is one of the best methods to save for a down payment on a house," Michael Simons, real estate broker and owner of Tres Amigos Realty Group, tells Parents. "You effectively cut the amount you pay for expenses and put the additional money in a savings account when you downsize."

Simmons and other experts suggest taking the downsizing much further than simply eliminating subscriptions. They advocate looking around at some of your more significant expenses as well and finding ways to do away with them.

"Families can downsize by selling one extra vehicle or relocating to a more economical area," suggests Simons.

Saving For A House FAQ

Here are the answers to a few common questions about saving for a house.

Can I Buy a House With No Money Down?

Yes. There are a few loan options to buy a house with no money down. If you are a military veteran, consider using a VA Loan for a 0% down payment. If you want to find a rural property and have a lower income (115% of the median area income or lower), you may be able to qualify for a USDA 0% down loan.  Both of these options are government-backed programs and can be a great option to get into a home with no money down.

What Is a Good Age to Buy My First House?

There is a no “right” age to buy a home. It all depends on how ready you are.  Before you buy a home, consider the following: Can you afford the monthly payment? And the maintenance?Is your job secure?Do you have a good credit score (to qualify for a good loan)Are you planning to stay put for at least 5 years (to recoup loan costs)Do you have any other large expenses looming? If you are unsure about any of those questions, it is not a good time to buy, no matter what your age.

Is Now a Good Time to Buy a House?

It depends. I know, not the answer you want, but it all depends on your financial situation and the local area where you are looking to buy. Real estate is hyper-local and finding a good agent to help you learn about your local market is a good starting point. Can you afford the payments, taxes, insurance and cost of maintaining a home? No matter what the market does, before you buy you need to be in the position to buy a house WITHOUT destroying your financial future. On a national level, interest rates are remaining low, but house prices continue to rise. If you are worried about missing out, it may be a good time to start looking. But the ONLY right time to buy a house is when you are financially ready.

How Much Should I Save for a Down Payment?

It’s no secret that we don’t like debt. That’s because car loans, student loans and credit card debt can tie up our income, leaving us with less money for the things we really want to do.

See how much house you can afford with our free

So how much should you save? That’s the million-dollar question! But don’t worry. You won’t need anything close to one million dollars to set yourself on the right track for buying a home. However, you do need to work through the process below to arrive at your magic number.

We’ll use an imaginary family—the Clarks—in our example.

1. Determine how much you can afford each month. The rule of thumb is to spend no more than 25% of your monthly take-home pay on your mortgage payment. If you tie up too much of your budget in your monthly payment, you leave yourself unprepared to face emergencies or embrace opportunities. We find that 25% (or less!) is the sweet spot.

For the Clarks, 25% of their monthly take-home pay equals $1,050 each month. Keep in mind that this number should include taxes and insurance, escrow, and homeowner association fees.

Do the math: Write down how much money you (and your spouse, if applicable) bring home each month. Multiply this number by .25 to find your monthly mortgage amount.

2. Use your monthly mortgage payment to arrive at a total mortgage amount. Let’s play around with our Mortgage Calculator to see what price range the Clarks should stick with.

When it comes to the type of mortgage you select, we recommend a 15-year fixed rate, which is guaranteed to save you tens of thousands of dollars compared with the traditional 30-year option.

We know the Clarks have $1,050 to spend on their monthly mortgage payment. Using the mortgage calculator and its set interest rate of 3.66%, we discover that they can purchase a $145,000 home with a 20% down payment, a $130,000 home with a 15% down payment, or a $125,000 home with a 10% down payment.

Do the math: Spend some time on our mortgage calculator. Input different numbers into the home value and down payment section with the goal of hitting your preferred total monthly payment. Make note of your options and talk things over with your spouse, a trusted friend or family member.

3. Aim for between 10% and 20% for your down payment. If you haven’t already, hone in on the percentage that works best for your family. Ideally, you’ll choose to put down 20%, which can lower your interest rate, open you up for a 15-year mortgage, and help you avoid private mortgage insurance (PMI).

Let’s assume the Clarks decide to put down 20% on a $145,000 home. That means they’ll need to set aside $29,000 for a down payment.

Do the math: Multiply the total mortgage amount by the percentage you plan to put toward the purchase of a home. Now you’ve got your savings goal! Circle it, post it on your fridge, and get ready to start saving!

The Bottom Line On Saving For A House And Down Payment

If you want to save for a house, you should have a solid plan in place. But first, make sure you know how much you need for the down payment. Though many people believe they need a 20% down payment to buy a home, it’s actually possible to buy a house with as little as 3% down.

VA Loans, for instance, allow you to buy a home with $0 down. Research your loan options and make an estimate of how much money you’ll need before you start saving.

There are plenty of ways you can save money for a down payment. Start by creating a budget for your household that includes saving a certain amount of money every month for your down payment.

You may also want to consider picking up a second job, moving into a more lucrative career or downsizing to save more. Reducing your debt, asking for help from friends and family members or renting out an extra bedroom can all also help you put away more money.

When you’re ready, apply online to get the homebuying process started.

3. Decide on a down payment amount

If you’re planning to take out a conventional mortgage, most financial experts recommend aiming for a 20% down payment to avoid paying extra each month for private mortgage insurance. PMI can cost anywhere from 0.3% to 1.2% of the loan’s principal balance, and is commonly paid to the lender as part of the monthly mortgage payment.

If you feel like it may be impossible to save up 20% of the purchase price, you’re not alone. The typical millennial homebuyer put down an average of 7.8% of their home’s purchase price as of April 2020, according to data

Suppose you want to buy a home in the $400,000 to $500,000 range. A 10% down payment would require paying more each month for private mortgage insurance, but would only require $40,000 to $50,000 up front. For a 20% down payment, you would avoid mortgage insurance payments but need $80,000 to $100,000 in cash to complete the purchase. 

5. Ask for gift money

When your family asks what you want for your birthday, Christmas or Hanukkah, anniversary or any other special occasion, tell them you’d love to forgo tangible items and instead receive gift money that you can put toward a house down payment. While not everyone may oblige, some of your relatives may enjoy knowing they’re helping you attain your dream of homeownership.

The Power of Compound Money Saving

Saving money gives you a tax advantage.A dollar saved is worth more than a dollar earned. Why? Because you’ve already paid taxes on that dollar, so it’s actually worth a dollar. That’s a big part of why having a solid saving strategy can benefit you in the long run.

Saving money begets saving money.Once you start finding ways to save money (and watching your bank account grow), it will start to become habitual. It’s a mindset shift that allows you to reevaluate certain practices and habits in your life to benefit your future financial security.

Compounding works for small amounts or large amounts.As you cut expenses, you’ll gradually direct your cash flow into savings and investments where it’ll start working for you.

Example: if you cut an expense by $100 per month, that’s $1,200 you can move into an income-generating investment account. Invested over 30 years in a mix of stocks and bonds averaging 7% per year, your $100 per month savings can grow to more than $117,000!

That means saving just $3.33/day equals a six figure nest egg over 30 years.

In the next section, we’re not only going to show you the 11 biggest ways to save money, but also how each will increase your net worth in the next 30 years.

When you see the numbers, you’ll have all the motivation you’ll need to get started implementing at least some of these strategies.

Hang up a picture of your dream house

This final tip is less about how to save money each month and more about staying on track with your efforts. Make sure your financial and home-buying goals are always top of mind so that you don't fall prey to frivolous spending.

"It's very easy to get distracted from your bigger goals each day. When that happens, people's money can go where they don't think about it going," Scott Alan Turner of Rock Star Financial Planning tells Parents. "Find a picture of your dream home and plaster it everywhere. On your bathroom mirror, on the wallpaper of your computer and mobile phone, on your refrigerator. Keep this constant reminder at the front of you, and you'll be more likely to make smart decisions that get you to your dream home faster."


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