With mortgage rates at historic lows, now is as good of a time as any to consider purchasing your first home.
The benefits of homeownership are plentiful, from both a financial and quality-of-life perspective. People trying to buy their first home face a common obstacle: having the funds for a down payment. If you are a U.S. Veteran, you can get a VA mortgage with no down payment. Otherwise, the FHA and some other conventional mortgages have down payments as low as 3% of the loan amount. Low down payments are available to applicants with strong compensating factors like a good credit score and other assets. With that said, a lower down payment means paying more interest over the life of the loan.
Set benchmarks that align with your life goals.
According to the National Association of Realtors, the median down payment in 2019 was 12% for all buyers, and 6% for first-time buyers. Set a goal of making a 20% down payment so you can forgo mortgage insurance, saving you money in the long run. With that said, we understand this isn’t always doable and how much you can put down depends on several factors. In how long are you looking to buy? Is there an area or neighborhood where you would like to buy a home? Having answers to these questions can help you approximate how to create the savings required to make a down payment.
You and your significant other are looking to buy a home within the next 4 years in a neighborhood with a median price of $750,000. A 15% down payment would be $112,500. Round up to $120,000 because the property values are increasing and could be a bit higher when you are looking to buy. Both you and your partner will need to save approximately $60,000 each over the course of 4 years, or $15,000 a year.
This may seem daunting, but you can do it! Reducing debt is the first step toward saving for a down payment.
A person looking to buy a home can’t save as aggressively to make a down payment if they have outstanding debt. Paying off this debt will save money in interest and free up funds to put toward a down payment. Being debt-free will also make an applicant more qualified for a mortgage.
Set a monthly saving goal and stick to it.
Based on the estimated down payment you need, figure out how much you need to save each month to hit your yearly goal. Set up recurring payments to the savings account you are using for your down payment. Keep your down payment savings in a high-interest savings account or a money market account.
Cost-cutting, budgeting, and creativity can help accelerate your timeline.
First-time homebuyers can withdraw up to $10,000 from a Roth IRA for a down payment on a home without paying a 10% penalty. If you have made profits on any higher-risk investments, put some of those earnings into a high-interest savings account. This could make up a modest portion of your down payment without having to actively save and budget for it!
Do you use streaming services to watch your favorite movies and shows far more than you use cable? Cut the cord or switch to a service like Sling that can give you the few channels you watch and not make you pay for channels you don’t use.
COVID-19 has slashed people’s usual nightlife and dining expenses. While the inactive social life has been tough on us all, a silver lining is the financial savings opportunity that has been thrust onto us as a result.
Are you still commuting to work? Are you not using your car hardly as much as you used to? Perhaps it’s possible to get an insurance adjustment because you are no longer driving to and from work five times a week.
Do you take a yearly vacation? Maybe you didn’t this year. Consider skipping the next one too, putting the money you would have spent into savings for your down payment instead.
Can you get a gift for a down payment?
Gifts toward a down payment can come from the applicant’s family, spouse, or employer. This is common, particularly for first-time homebuyers.
We hope that some food for thought has been provided and you can now create a plan to successfully save for a down payment. As always, we are available to talk further if you have any questions: firstname.lastname@example.org | (800) 448-8101