If you’re thinking of buying a new home, it’s time to start saving for a down payment. A solid down payment makes you a more attractive buyer, helps you get a better rate and can secure you a nicer home. So, before you begin looking for that dream house, it’s smart to determine your budget and therefore your down payment requirement. A good mortgage calculator can show you just how much a good down payment can save you over the long run and here are some other tips to help make saving for a down payment easy.
Deciding how much you need for a down payment
Typically, your housing expense should not exceed 28% of your gross monthly income. For example, if your income is $5,000, you can afford roughly $1,400 for a house payment, HOA fees, insurance and taxes. With 20% down you’ll eliminate the cost of private mortgage insurance (PMI) and will likely secure a better mortgage rate saving you even more.
How much time do you have to save for your down payment
One year? Three years? Five? Once you’ve determined how much you need, divide the amount by how many months you have until your purchase. Planning to buy a $300,000 home in 5 years? You’ll need $60,000 for a 20% down payment. $60,000 divided by 60 months is $1,000 per month.
Helping your down payment funds grow
Saving for the down payment typically means you’ll need access to your funds within a short timeframe. Earning big returns in high-risk stocks might sound attractive, but the potential for losses in the short term make stocks undesirable. The last thing you want to do is potentially lose the money you’re saving for a down payment. More conservative routes, like a certificate of deposit (CD), provide you with guaranteed returns and insure your money will be there when you need it.
Automate your down payment savings
Since you are trying to save thousands of dollars for the down payment of a house, you might need to add extra income (a second job) or tighten your budget (avoid that expensive morning coffee purchase). Either way, automate the budget process by having a percentage of your paycheck sent directly to your savings vehicle.
Put unexpected income towards down payment savings
Bonuses. Tax returns. Gifts. Commissions. Unexpected windfalls can speed you on your way to achieving down payment goals. With that said, be prepared to document any large home deposits that are not from obvious sources. If you’ve received your tax refund, the loan underwriter will move on, but if your parents gave you a big gift, you’ll have to explain where the cash came and prove it’s not a loan. Other restrictions apply.
Saving for a down payment can seem daunting, but it’s actually great preparation for home ownership. If you can save for the down, you’ll be well disciplined for expenses of home ownership.