If purchasing a home is on your agenda this year, then you may currently be in the process of saving for a down payment. Putting a significant down payment on a home can help lower your monthly mortgage payments and in turn, save you money in the long run. But for most people, enough money to secure a down payment is not going to appear out of thin air. Saving for a down payment is a process, and it’s one that you may opt to start earlier rather than later—even if a home purchase is years down the line.
Buying a home is likely the largest purchase you will ever make, so getting your finances in order ahead of time is critical. Here are five tips to help you when saving for a down payment.
- Set a savings goal. Before you begin saving for a down payment, you’ll obviously need to know exactly how much you need to save. A mortgage lender can tell you how much of a mortgage you qualify for, which can help you when deciding how much your down payment will need to be. In general, a minimum 20 percent down payment on a house will help you get the best deals on your mortgage rate. How much house you will be able to afford also depends on your monthly income, and how much you are able to save.
- Establish a savings timeline. Once you have a number in mind representing your savings goal, you need to determine your timeframe for reaching that goal. If you want to purchase a home within a year, then obviously you will need to ramp up your savings more than if you plan to purchase a home in the next five years, for example. Having a time frame in mind will help you stay on track toward reaching your savings goal.
- Save in safe investment vehicles. Because you are saving toward a specific purchase, in a specific time frame, it is less prudent in this situation to place your money in high-risk investments like stocks, for example. Instead, keep your money when saving for a down payment in a place where you know it will be protected, such as a savings account or certificate of deposit. You will not yield as high of a return in these investment vehicles as you could potentially earn through stocks, but you will also not have to worry about your money disappearing if the market crashes.
- Save automatically. Automating your savings process when saving for a down payment is one of the easiest ways to save. Set up regular automatic deductions from your paycheck or checking account into a savings account. After a while, you will not even notice the money missing, and your savings account will grow. Start small if you need to—(depending on if your timeframe allows it), and gradually increase your savings contribution over time.
- Reduce your expenditures to save more. The less money you have going out, the more money you have to put into savings. Think about ways that you can save within your lifestyle. Do you eat out frequently? Consider cooking at home. Do you spend money on luxuries that you don’t necessarily need? Put these on hold, at least until you have reached your savings goal. You will be surprised to discover how much money you are able to put away when you make small cuts within your everyday budget.
- Save less for retirement. Sound counterintuitive to everything you’ve ever been told? Despite that saving for retirement is something ingrained into our psyches when it comes to our finances, temporarily curbing how much you are putting away for retirement can help you reach your down payment savings goal sooner. Because a house is a form of investment, you are actually helping your future financial self when purchasing one (in a sense, securing an investment that can help you in retirement). Do not pilfer your retirement account, and do not stop saving altogether, but it is OK to allocate a portion of your savings efforts away from retirement and toward a down payment for a period of time.
Saving for a down payment can seem daunting, but formulating a plan ahead of time can help you feel better about reaching your goal, and can help your goal become a reality.
If you are looking to buy or sell a home in the Auburn, Opelika or Lake Martin areas, contact Realtor Ryan Roberts today at 334-750-9872, or email [email protected]!
