The alternative to renting your living space is to purchase a house, usually by providing a down payment and getting a mortgage that you pay each month. At the end of your mortgage term, usually between 15 and 30 years, your payments end and you fully own the home.
Buying a house is one of the biggest transactions you are likely to make in your lifetime. While there are a few options to buy a house with no money down, most banks will require a down payment of between 3 and 20% of the total purchase price in order to get a mortgage. Mortgages with less than a 20% down payment typically have required insurance payments known as PMI that guarantee the mortgage will be paid if the buyer defaults for any reason.
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Deciding the Down Payment
Because of the need to put at least some money down, most would-be homebuyers need to save a significant amount of money before they can make a purchase. Here are a few steps you can take to decide the size of the down payment you need.
1. Look at some houses.
What kind of house do you want? A realtor in the area in which you want to buy will be able to show you some homes in order to decide the size and type of home you will likely buy and what the cost or range might be.
2. Look at your time frame.
When would you ideally like to buy a home? If your time frame is short, you may need to buy a smaller home or find a way to save more money. If you have several years to save, however, you will have more options.
3. Look at percentages.
While a down payment of 20% is ideal for avoiding PMI and qualifying for the best possible rate on your mortgage, you may only be able to put down 3-5% if you need to buy soon and don’t have a large amount of extra cash each month.
Once you have decided the approximate price of the house you want to buy, the amount of time you have to save, and the percentage you want to put down, you should come up with a number that represents how much you need to save before you buy a home. Now, it’s time to figure out how to do it.
One note: You should add several thousand dollars to the amount you have decided to save for the down payment in order to cover moving costs, furniture, and other items you will need for the new home, as well as a fledgling emergency fund for the things that always break right away.
Best Methods of Saving
Even if you don’t plan to purchase a home for several years, it will benefit you to maximize your savings in the shortest possible time frame. Not only can you move forward to buy a home sooner if you reach your goal more quickly, but there’s always the chance that you run into some emergency situations that eat up what you are able to save for a while.
Here are the best ways to save:
1. Cut out non-necessities.
One way to maximize your savings is to cut line items from your budget that you don’t really need to spend money on. This list will vary depending on the individual. Some may be able to give up cable or streaming subscriptions, while others may feel more comfortable giving up most restaurant meals or daily $5 lattes instead.
2. Reduce costs.
If you haven’t compared costs for your cell phone, trash hauler, or car insurance in 6 months to a year, you may be able to find a cheaper rate by switching companies or asking your existing company for any available discounts. When you apply this strategy to all your bills, you can usually save hundreds of dollars a month.
3. Sell stuff.
If you have items around the house that you aren’t using, now is the perfect time to sell them and put the money toward your house fund. Outgrown sports card collections, collectible figurines, old technology, and designer clothes and accessories can bring in several hundred dollars or more. Ebay is probably the largest selling app, but many people have found success with Poshmark, Mercari, Facebook Marketplace or other local groups where you can post your items for free.
4. Get a side hustle.
If you have lowered your budget as much as possible and sold your extra items, but still need to save more, you can pick up a part time job or find another way to make some extra money each month. Some side hustles that don’t involve getting a second job are mowing lawns/shoveling snow, babysitting, tutoring students, or teaching classes at the community college, if you are qualified. There are lots of jobs available right now as well, so it should not be very hard to find something you’d like to do a few hours a week.
5. Put off recurring costs.
If you really want to supercharge your savings, you may be able to save hundreds of dollars by putting off or stretching recurring costs to a longer time frame. If you normally have a housecleaner come every week, try every two weeks instead. Stretch out your haircuts an extra week or two. Some things are too important and should not be put off (medical tests, for example).
6. Get a loan.
If your monthly income will allow it and you just can’t squeeze your budget any more, you may be able to get a loan to cover all or part of the down payment on your home. Keep in mind that having two loans—the down payment loan and the mortgage–will make your housing cost more expensive, but if you are on a very short time frame before you need to purchase, it can make sense to borrow the money you need.
By following these strategies, you will be able to save the money you need to purchase a home sooner rather than later so that you can settle in and get on with your life.