With mortgage rates finally dropping below 7%, you might be wondering if now is the right time to jump into the housing market and buy your first home. You’ve already played around with Redfin’s mortgage payment calculator to get a range of how much mortgage you can afford and now you’re just wondering how you can save up for a down payment as quickly as you can. Saving for a down payment takes a little bit of planning, a lot of discipline, and sometimes more time than you realize. Here’s how to get it done.
Begin with a plan
The first task is to create a plan. You need to know where you’re going so you can successfully plot your course. Let’s assume you’d like to purchase a home with a sales price of $450,000. Your lender will require a down payment of at least 3% of the sale price of the home, depending on the type of loan you choose. In this example, 3% of $450,000 equals a $13,500 down payment.
Remember, the more down payment you put toward the loan, the lower your monthly payments will be and the less interest you will have to pay during the life of your loan. Also, lenders typically add Primary Mortgage Insurance (PMI) to any conventional loan having less than a 20% down payment. PMI increases the amount of your monthly mortgage payment, so if you aim to put 20% down, you can eliminate from having to pay PMI altogether.
If you decide to put a 20% down payment on a $450,000 home, you’ll need to come up with $90,000. It may take some time to accumulate that amount, especially if you are just starting to save.
You will also need to decide how aggressive you can be in saving for your down payment. Let’s say you’d like to have $90,000 saved in two years. That means you will need to set aside approximately $3,750 each month to achieve your goal. Where will that money come from? We’re here to help – here is how to save for a down payment in 7 simple steps so you can get on the path to homeownership.
The impact of your down payment on monthly mortgage costs
Your down payment has a significant effect on your monthly mortgage payments, as well as the need for Private Mortgage Insurance (PMI). In the example below, you’ll see how different down payment amounts—20%, 10%, and 5%—affect the monthly payment for a $500K home with a 6% interest rate. A larger down payment can reduce your monthly costs by lowering both the principal and potentially eliminating PMI, while a smaller down payment increases monthly expenses due to added PMI charges and higher principal payments.
1. Eliminate high-interest credit card debt
To eliminate high-interest credit card debt and save for a down payment, organize your credit cards from highest interest rate to lowest and work to pay them off in that order. Another idea is for you to consider transferring high-interest rate cards to a zero percent interest rate offer. Banks often provide up to 12 months with no interest charged on these cards. This can be a great way to eliminate your debt as long as there are no annual fees or balance transfer fees associated with the card, and only if you can get the debt paid off within the promotional period.
Pro Tip: Paying down high-interest debt will also help you in attaining a lower interest rate on your home loan when you’re ready to apply and start the homebuying process.
2. Tighten up your spending
This is where you take a good, hard look at your monthly budget. What are you currently paying for that you can (temporarily or permanently) do without? Here are some ideas to get you started:
- Create a Budget: Track your income and expenses to see where your money is going. Set spending limits in areas like dining out, entertainment, and shopping.
- Cut Unnecessary Subscriptions: Review all your monthly subscriptions, such as streaming services or magazine deliveries. Cancel the ones you can live without.
- Cook at Home: Eating out frequently can be expensive. Try cooking at home more often, meal prepping, and planning your grocery trips to save money.
- Limit Impulse Purchases: Avoid unplanned purchases by making a list before shopping and sticking to it. Consider waiting 24 hours before buying anything that isn’t essential.
- Reduce Energy Costs: Simple actions like turning off lights when not in use, using energy-efficient appliances, and lowering your thermostat can lower your utility bills.
- Shop Smart: Look for discounts, use coupons, and consider buying generic brands for household essentials. Shopping sales can make a big difference in your monthly expenses.
- Review Insurance Policies: Shop around for better rates on car, home, or health insurance. Adjusting your coverage or bundling policies can lead to significant savings.
3. Increase your income
A great way to turbocharge your savings is to increase your income by taking on a second job or side hustle. When considering a side hustle, think about options that both complement your current profession and those that appeal more to your sense of passion.
For instance, maybe you work as a schoolteacher, but you love refinishing furniture. Refinishing furniture could be something you could do evenings and weekends to earn extra money to hit your down payment goals.
Other side gig ideas might be for you to substitute teach or sell some of your unused possessions online. Are you creative? Maybe it’s time you started your own business by selling your creations.
4. Stash away ‘found money’
Found money is money you receive somewhat unexpectedly, like a gift or a tax refund. Instead of spending it, drop it in your down payment savings account right away.
It could also be an annual raise, inheritance, or a bonus from work that you receive infrequently. If you get a raise at work, continue to live off your previous income and put that extra money directly into your savings account each payday.
Remember that high-interest credit card debt you paid off in step one? Once that card is paid in full, continue paying yourself the same amount as if you still had the payment every month, but instead pay it into your down payment fund.
5. Track every dime you spend
Be watchful of places where there may be savings waiting to happen. Have you been thinking about trading in your old car for a newer model? See if you can put it off for after you buy your home and instead put that money into your down payment savings account.
Do you indulge in a luxury vacation once or twice each year? Or maybe you take a couple of smaller, weekend getaway trips each month. Instead, look into staycation ideas, and drop the money you would be spending on gas, lodging, and food right into your savings.
Tighten up your clothing allowance. This may not be the time to get that purse in both colors or worry about the latest fashion trends. Instead, put that clothing money aside to save for a down payment.
6. Borrow from relatives to help save for a down payment
If you’re fortunate enough to have supportive relatives, consider asking them for help with your down payment. Many lenders allow borrowers to use monetary gifts from family members to cover part of the down payment. To do this, the lender typically requires a Gift Letter from the family member providing the funds. This letter must clearly state that the money is a gift and not a loan, meaning no repayment is expected. Be sure to have a candid conversation with your relatives about this option and ensure all documentation is in order to avoid complications during the loan process.
7. Set up a high-yield savings account
Open a high-yield savings account to maximize the interest you earn on your savings. This can help your down payment fund grow faster by earning more interest compared to a standard savings account. High-yield accounts typically offer interest rates that are several times higher than traditional accounts, making them a smart choice for growing your money over time. Additionally, most high-yield savings accounts are easy to open online, and they often have low or no minimum balance requirements, allowing you to start saving right away, no matter the size of your initial deposit.
