For many people, the first step in buying a home is saving for their down payment. It can seem like a tough goal when you start saving, even if you don’t plan to buy for years. But there are a few things you can do to help speed up the process. Here are some tips to help you start saving for your new home.
Determine your budget
Knowing how much you need to save will help you create a focused plan to reach your goal. To do this, you need to consider how much you can afford for your new home. Keep in mind that most people can qualify for a higher mortgage than they can comfortably afford. Use a mortgage affordability calculator to help you figure out what you could borrow, then talk to a mortgage advisor to better understand what fits your budget.
Perhaps the most common down payment amount you’ve heard of is 20%, but there are lower down payment options available. However, a larger down payment can mean lower monthly payments and you’ll pay less interest over the life of your loan. It can also help you avoid the added expense of private mortgage insurance (PMI).
Remember to calculate the other costs of buying a home, including:
• Closing costs and fees
• Home insurance and property taxes
• Moving expenses
By taking all of these expenses into account, you will have a better estimate of how much you will need to save.
Think about your timeline
Thinking about when you want to buy a home will help you start planning how to save. Decide on a period, then divide your savings amount into monthly amounts. For example, suppose you want to buy a house in five years and need to save $ 60,000 for down payment and other costs:
• You would need to save $ 1,000 per month for five years ($ 60,000 / 60 months = $ 1,000 per month).
Having a monthly savings plan can help you focus your efforts and make your down payment goal more achievable. It can also help you make better decisions about what you can afford and a reasonable time to do so.
Pay off your debt
When trying to save for a home, it can seem counterintuitive to spend money on debt.
After all, shouldn’t every extra penny go into a savings account? Not necessarily. Paying off your debt can help you buy your home in two main ways:
It’s good for your credit score. Credit scores have a big impact when it comes to qualifying for a mortgage. The better your credit rating, the lower your mortgage interest rate is likely to be. By paying off your debt, you can have a positive impact on your credit rating. It shows lenders that you are able to cover your expenses.
It can free up savings in the future. By paying off your debts, you can gain leeway in your monthly budget. The money you used to pay your bills can now go straight to your savings account rather than paying interest on other debts like credit cards. The bonus is that you won’t notice the difference in your budget because the money was coming out anyway.
Paying off your debt can also help you after you buy your home. The money you spent can now be used to modernize and decorate your new place.
Reduce your expenses
Now is a great time to take a close look at your spending and decide what you can do without right now to save for a home. Saving doesn’t necessarily mean eliminating all of your discretionary spending. But the more you reduce, the faster you will reach your financial goal. Here are some steps to reduce your expenses:
1. Start by listing all of your expenses, then look at where you could cut back. Consider everything, even an expense like rent. Could you move into a cheaper property or share the bills with a roommate?
2. Take a close look at your monthly membership expenses. Do you need a cable when using streaming services most of the time? Or could you ditch the gym membership in favor of running on local trails?
Maybe make coffee at home instead of going to the local coffee shop?
Only you can decide what you’re willing to live on while you work to save for your down payment.
But remember, you won’t be saving for a down payment forever. A few years without this subscription will be worth it when you’re sitting in your new home.
Automate your savings
The more you can automate your savings, the easier it will be to stick to the plan. Create a monthly payday direct debit to send money directly to your savings account. That way it moves around without you ever seeing it. Also make sure to keep your savings separate, either by opening a new account with your current bank or even opening a new account with another bank.
This type of automated savings plan is known as “pay you first”. You pay off your savings account first, then see what you have left to spend for the rest of the month. This removes the temptation to wait and see what is left to save at the end of the month.
If you don’t know how to set up a direct deposit to your savings account, contact your bank. There are also savings apps that can help automate the process. Just be sure to read the fine print to make sure the money will be available for withdrawal when you need it.
Put “found” money to work
The money found is the money you earnn it does not come from your monthly income. It’s those unexpected deals that you don’t factor into your budget. Things like tax refunds, birthday or holiday cash gifts, a work bonus, and discount offers are all “found” money.
Instead of pocketing the money, put it in paying off your debts or building up your savings. Even small sums here and there can add up quickly over the years as you save for your home.
Cover yourself with an emergency fund
The plans are big, but life is coming. Protect yourself and your savings by creating an emergency fund. Set aside money you can use for unforeseen expenses like car repairs or a medical emergency.
You can use this money instead of paying with a high interest credit card or withdrawing your down payment. When the emergency is over, pay off your emergency fund first, then resume your savings plan.
When you start saving, you may feel like you have a long way to go to reach your ultimate goal. But over the months, your enthusiasm will grow as will your savings. As you save, make sure you know all of your mortgage options and keep an eye out for interest rate.
Marion Crane, Senior Mortgage Advisor, Chase
Sandeep RajGuru, Senior Mortgage Advisor, Chase