How To Save For A House
Many first-time homebuyers find themselves discouraged by the challenge of saving for a house. Even with the best of intentions, it can be hard to make progress when other expenses, like an unexpected car repair, keep making their way to the front of the line.
The good news is, you may be able to buy a home with a smaller down payment than you think. The median down payment is 6%, and some loans allow as little as 3% down. You may also qualify for one of many down payment assistance programs. A mortgage lender or real estate agent should be able to talk with you about how to make buying a home more affordable.
Benefits of saving for a house
No matter how much you reduce your costs, though, you'll still need to pay some money up front. In fact, the more you can save toward a home, the more advantages you'll have when you apply for a mortgage loan:
- Pay less for your loan: A larger down payment reduces your mortgage insurance and may qualify you for a lower interest rate, which saves you money in the long term.
- Have enough cash to close: You'll have money available for closing costs, which are the fees and taxes you pay when the home becomes yours.
- Be prepared for emergencies: An emergency fund for home maintenance repairs or other surprise expenses looks good on your loan application and is always a smart move.
How to save money for a house: questions to ask
What does your financial health look like? Do you struggle to put anything in savings, and sometimes find yourself short of funds to pay bills each month? If this is your situation, consider your overall finances and goals before deciding on the best way to save for a house.
- What does homeownership mean to you? Why is it an important goal?
- Would it make sense to continue renting instead of buying a house?
- Can you see yourself making some lifestyle changes or sacrifices to buy your first home?
Answering these questions can help you prioritize and stay motivated as you work toward your goals.
Do a little homework. If you've decided you're ready to buy but are held back by lack of savings, do some research so you know what you're aiming for.
Figure out how much you need to save for a house. This will depend partly on the prices of homes you're looking at. Once you have an average price, you can use a mortgage calculator to estimate your down payment and monthly payment. Keep in mind there will be other costs associated with buying a home.
Examine your credit situation. If your credit score is on the low side or you're carrying a lot of debt, you may still be able to buy a house. Lenders have programs for people who are working to repair their credit or have very little credit. Get pre-approved early to find out how your credit could affect your mortgage approval; you may decide to put more of your savings toward debt for a while.
When you know how much money you need for a home and where your credit stands, you can get serious about saving.
7 strategies to save for a house
Saving for a house or any major purchase is often about making small changes that pay off over time. It can also mean thinking outside the box when it comes to income and lifestyle. Not only will you grow your savings, but you'll also create new financial habits that could serve you well for a lifetime.
1) Keep your expenses low. This doesn’t mean that you can only eat noodles with ketchup for the next year. While that’s one way to keep expenses low, what we really mean is you need to make cuts to your spending wherever you can. For instance, if you've been considering buying or leasing a new car, think about how much those monthly payments will eat into your potential savings. Can you get by with the car you've got, buy used, or settle for public transit a little longer? The same goes for vacations or other aspects of your lifestyle you may want to revisit now that you're thinking of buying a house.
Even a few small changes can add up to real savings. Cut back on your cable or satellite TV package, and pay attention to habits at home so you can keep your utility bills low. Set your thermostat lower (or higher) and make clothing adjustments rather than blasting the heat or A/C. Changing habits this way can save a lot of money over the course of a year. Keep in mind, you may be sacrificing your comfort a little now to live comfortably in your new home later.
2) Work overtime, get a second job, or make a case for a raise. Working more may seem daunting, and asking for a raise is a lofty goal—but remember, your big-picture plan is to save for a house. Having more income can make a major impact on your ability to save, compared with other smaller changes. Perhaps there are overtime opportunities at your current job. Ask for more hours or see if you can work shifts for co-workers.
If a raise or promotion is possible, advocate for yourself and take that next step. If you're not sure how promotions work at your company, ask your manager, a coworker, or HR. Reach out to others in your field or potential mentors who can give you advice. If you succeed, celebrate (with a small reward!) and then put as much of your new income as you can toward saving for a house.
3) Become a conscious spender. Think about what triggers you to overspend and ignore your budget. Do you tend to go on a spending spree when you're happy? Upset? Stressed? Once you identify these triggers, you can make a plan that curbs your spending when the situation arises. For example, take yourself out for a walk or call a friend instead of online shopping. If you’re celebrating a small accomplishment, reward yourself but consider waiting on that new $100 pair of shoes. Keeping your eye on the goal can make it easier to adjust your habits and focus on how to save for a house instead.
4) Sell assets you don’t need or use. You may be thinking you don’t really own anything of particular value to sell. But if you have two vehicles, ask yourself whether you only drive one the majority of the time. Consider selling the other car and putting the money toward a home.
You can also look around for personal items that are gathering dust—selling them could give your savings a nice bump. Some items you may no longer use include sports equipment, kid gear, clothing, jewelry, or small appliances. Remember—this is how to save for a house, by letting go of things you don't really need in exchange for a bigger dream.
5) Schedule all of your bill payments. It's possible to set up automatic payments for just about anything nowadays. Most banks will let you do this on their site or app for free. This can help you keep your bills paid on time and eliminate extra fees for interest or late payments.
Before you schedule a payment, though, make sure you understand your bill. Are there any unfamiliar charges on it? Are you paying only for what you need? For instance, cell phone companies are notorious for adding extra surcharges. They may waive the charge if you request it, but if not, the fees keep going up. Make sure you also review your monthly credit card statements for any strange charges, even if you pay the bill automatically. And if you're paying for cable or other services you don't use, cancel them.
6) Reduce your bank fees. Bank fees can eat away at your checking and savings accounts if you're not paying attention. To reduce or eliminate these, talk to a representative at the bank about finding an account that better suits your situation. Do you have a lot of transactions per month and need an unlimited transaction account? Can you ask for lower fees, or consolidate your transactions by paying cash instead of using your debit card? Another option is to shop around and switch banks for one with better options.
7) Shop smart. If you haven't already, add up how much you spend on groceries every month. You might be surprised at the total. If it's higher than you thought, see if you can reduce it with better meal planning and by shopping around for better prices. Many stores have price matching, which means they'll give you a competitor’s lower price on products.
The same principles apply when buying online. Shop around, and keep an eye out for coupons and discounts. If you add everything to your shopping cart and wait a day or two, some companies will offer discounts to encourage you to finish your order.
Add up the potential savings from all of these strategies, and you may find more than you expected. With some conscious changes to your habits, it's only a matter of time before you’ve learned how to save money for a house and you're able to buy your first home.
Originally published by Redfin