Even if you don’t plan to purchase a house for several years yet, you’ve almost certainly thought about how you will save up for a down payment. You must slowly set aside a lot of small amounts of money – investing in stocks simply won’t work here. Before you begin saving for your house, you should know a ballpark of how much you want to save up. Sit down with a mortgage lender or broker who can let you know how much of a mortgage you qualify for – and what percentage of that amount you should aim to save up for use as a down payment.
In today’s lending market, you should expect to make a 20% down payment. This is the average, but you can pay more if you wish – or less if that’s all you can manage. 20% is not a requirement, but the minimum advised payments for the best deals. If you put down less, you will likely be paying a higher interest rate, which can come back to bite you later. Weigh the pros and cons to come up with a number for what you wish to save up for a future down payment, and let that number be your ultimate goal.
The idea of saving up for a down payment can be stressful. The amount looks quite big – and it is. On top of that, it can take a long time to save up for if you don’t know what you’re doing or how to plan your budget. Of course, you could squirrel away a little money here and there each paycheck, but that won’t do it. You’ll have to get creative – here are our best ideas for saving up for a down payment.
Transfer a Fixed Amount Into a Savings Account Every Month
Of course, we still have to mention it – probably the most basic and most reliable way to gather up money for a down payment on a house is to simply save money. It is also the most convenient way to save, as most big banks will allow you to set up automatic direct deposit into a savings account. As long as you can commit to only using these savings for your down payment and nothing else, you can sit back and watch your money roll in – and all it will take from you is a trip to the bank to set up the savings account.
Skip Family Vacations for Now
When you’re trying to save up for something as financially hefty as a down payment, it doesn’t make sense to drop multiple thousands of dollars on a trip that will only last a few days. Your new house will last forever! Use your money on that. If you save up the money you would have spent vacationing, you can make a huge contribution towards a down payment. To supplement the need to get out of the house, save money by taking “in-town” trips. You will be surprised how many fun things are right up the road from you – no trek to Hawaii involved.
Review Your Expenses
We all know someone who has so many monthly subscriptions (video streaming services, music streaming services, monthly surprise box deliveries, food delivery services…) that they can’t name them all. Don’t be that person! Look over your expenses and see where you can cut back. If possible, try to cut back on more than just monthly subscriptions – can you be more frugal with your water usage to lower your water bill? Can you spend a little less on groceries? Can you buy store-brand for a while, instead of organic superfoods? Can you reduce your twice-monthly water jug delivery to just once a month? Take the money you end up saving by doing this and put it towards your down payment.
Investigate Your High-Interest Rate Debt
Check out the fine print on your credit cards. What is your interest rate? If you have multiple credit cards, make note of which is the highest interest and which is the lowest. Start by paying down your highest interest rate card. When you’ve paid the entire balance, close it, and start working on the next highest interest rate card. Don’t want it to take that long? Transfer your balances to the card with the lowest interest rate, then close the other accounts. Take the money you would have spent on interest and put it in your savings account for your down payment.
Borrow From Relatives
We’ve all heard the jokes about calling your parents for money – but there’s nothing wrong with it if they are willing and able to help you. In fact, it’s incredibly common for parents (or other family members) to help out with a down payment when it comes to buying a first home. Over 50% of first time home buyers as well as home buyers under the age of 30 say that their parents helped them with a down payment. The only thing that is required of you is to include the amount on your loan application. You cannot also take a loan from a family member to use on a down payment – it must be a gift, and the family member must write a letter stating as much.
Borrow From Your Retirement Plan
A lot of retirement plans allow certain penalty-free withdrawals – a common one is for home buyers. Many employer-sponsored 401(K)s or profit sharing plans allow employees to borrow against their own savings to purchase a home. If you don’t know, and your plan is sponsored by your employer, you can ask your HR department or your payroll department to help answer your questions. If your plan is not employee sponsored, you can call an accountant or a financial advisor to help you.
Sell One or Some of Your Investments
Think of it this way – you aren’t getting rid of your precious investments, you’re moving them into another investment vehicle (your new home). This is because you accrue equity in your home as you make payments on your mortgage. As your home value increases, your investment does too. Look at your current investments, and sell off what you can. It may help a lot! Use the money you get from selling and put it towards your down payment.
Get a Second Job
This can be stressful, but is worth it if you have the time. If you are already currently living off of what you make, you can put all of your money from your second job towards your down payment. Just make sure that you really do this. Suddenly having a few extra thousand dollars a month can end with impulsive spending sprees, which detracts from the whole reason you got a second job in the first place. If you don’t have time for a full time job, get a part time one. Even just a few extra payroll hours per week can make a big difference.
Look Into Down Payment Assistance
There are a lot of organizations, government and otherwise, that exist to help people come up with the money for their down payments. Check to see if you qualify for down payment assistance from the Federal Housing Administration, the US Department of Agriculture, the Rural Housing Service, and the Veteran’s Administration. You can also look into local housing authorities to see if there is anything that they can do to help you. Check with your bank, too! Just make sure that you read all of the fine print and that you do your due diligence – don’t just take any amount of money you are offered without asking questions.
Start a Side Hustle
A side gig can act as a “second job” on your terms, where you set the times you work and decide what you want to do. You can walk dogs, referee sports leagues, tutor school children, babysit, pet-sit, mow lawns, do nails out of your home, have a yard sale, or sell off your unwanted items. If you add in just 16 hours per week making $10 per hour, you get an extra $120 a week after taxes to put towards your down payment! In two years, you’ll have an extra $12,400. It adds up fast!
It can be extremely hard to save money for a down payment when your rent keeps going up every year. When the median rent rises 32% in ten years but household incomes don’t increase by much at all, your ability to save money is what takes the bullet. It is estimated that it would take a person under 30 seven years to save for a 10% down payment. But by using these simple tips, you can make it a little easier. Wise money behavior sets you up to make home ownership a blessing instead of a financial burden.