Lately, it seems like all of my friends are either getting married, having children, or buying homes. A lot of my friends down here in Florida work in Real Estate, and according to them, Millennials, at least in the Tampa Bay area, are leaning towards buying a home rather than renting one. With affordable mortgage rates, tons of inventory, and rent rates continuing to creep up, home buying here really is the best option. That is, of course, if you have enough for a down payment.
Since Matt and I have been saving up to buy our first home, we spend a lot of time talking about the neighborhoods we like, our non-negotiables, and different savings strategies. And since there are people all over the country having the same conversation every day, I thought it would be helpful to go over some helpful tips on how to save for a down payment.
Some people may have a decent amount in savings and some people may be starting from scratch. Regardless of what your situation may be, the tips below can help you reach your down payment goal.
1. Determine Your Budget: The first thing you need to do is determine exactly how much house you can afford. It’s helpful to talk to your bank during this process but you can also find online calculators to guide you in the right direction. It’s important to be realistic here. Sure, a five bedroom home on the beach with an infinity pool and roof deck would be fantastic, but, can you afford it? We spoke to a few different loan officers about our credit standings, what we have in savings already, our current income, and our assets to help determine our budget.
2. Determine Your Down Payment: Once you know how much house you can afford, you’ll need to decide what you want to put down. Ideally, you will be able to leave 20 percent. A 20 percent down payment usually eliminates the need for Private Mortgage Insurance, which will then lower your monthly expenses. Additionally, with a 20 percent down payment, you’ll have instant equity in your home which will be valuable down the road should you ever decide to sell. However, you don’t necessarily have to put down twenty percent. You can still find a wonderful home with a smaller down payment and in some cases, like ours, even with private mortgage insurance, we would still be spending less on a monthly basis than we currently are now as renters.
3. Set up a Savings Strategy: There are tons of ways to go about saving money. Your strategy depends on your current income and expenses, as well as your timing goal. If you are in no rush and just thinking ahead with no specific goal in mind, you can be a little more lenient with your savings plan. However, if you want to be a homeowner within a specific amount of time, say two years for example, there are better ways to go about it. A great method is to determine the difference between your current housing costs and your projected mortgage rate (determined in tip number one), and then put that amount aside every month. This not only helps you save money, but is also helps you determine whether or not you are really in the position to buy a home. Other savings methods include automatic transfers into a savings account and setting up a separate savings account for your down payment only so you aren’t tempted to dip into it for other things.
4. Put Your Savings to Work: A lot of standard savings accounts earn less than one percent interest. How sad is that? Not very helpful. Look in to different options like a high yield savings or money market account. It may also be worth it to look into a CD account. You’ll notice less flexibility but the yields can be a game changer.
The decision to buy a home is big and amazing but the thought of how much a down payment should be can be daunting to say the least. Going in with a clear goal and saving strategy is a great way to make the task less terrifying.
Are you a current homeowner? What advice can you offer about saving for a down payment?