If you want to buy a home, you need to determine how to save for a down payment. Most lenders require at least some money for a down payment. But how do you get started saving so money to buy a home? These tips on how to save for a down payment will help.
Whether you're in need of a first-time home buyers guide or have ample experience in the real estate market, saving for a down payment can be a challenge. Here are seven steps you can take to ensure you have the necessary funds to purchase your home.
The first step to determining how to save for a down payment is to calculate how much you need. To determine your desired down payment, consider:
You need to save not only for a down payment but also for any closing costs your lender might charge. These can add up to 2% to 5% of your home's value. They typically need to be paid out of pocket when you close on your home loan.
Some mortgage lenders allow you to roll closing costs into your loan. But this means you're borrowing even more money. As a result, it can be harder to get approved for a mortgage if you choose to roll closing costs into your loan. This can also make your closing costs more expensive over time since you'll pay interest on them.
It takes time to save up for a down payment. To meet your savings goal, you need to keep the money in a safe place until you're ready to buy. You don't want to risk investing in the stock market and losing the money. This is especially true if you'll be buying a home soon.
A high-yield savings account is often the best place to put your down payment. These accounts let you access your savings when you need it and offer a higher interest rate than a traditional checking or savings account. There's also no risk of losing your savings so long as your bank is FDIC insured.
You can also explore other risk-free investments, such as certificates of deposit (also known as "CDs"). If you've never heard of CDs, check out our guide: What is a CD?
If you decide to invest in a CD, shop around for the best CD rates to see how they compare to the interest paid by a high-yield savings account. However, be aware that CDs have strict withdrawal requirements. You may not be able to access your money immediately when you need it, unless you pay a penalty.
Determining when you plan to purchase your home helps you decide how much to save each month to end up with your necessary down payment.
If you're buying a house in two years, you'll need to be more aggressive with your savings goal than if you intend to wait five years. If your goal is a $60,000 down payment, you'll need to save $2,500 per month to buy a house in two years. But, you'd need to save $1,000 per month if you save for five years.
Your timeline and desired down payment determine how much you need to save each month. Create a budget that treats this saving as a must-pay bill.
If you need to invest $1,000 per month to buy a home in five years, work that amount into your budget. This could mean cutting discretionary spending to free up enough cash to meet your savings goal.
Once you've found room in your budget for saving, automate the process. Have your desired sum automatically withdrawn from your bank account on payday. Arrange to have it directly deposited into your down payment account instead of into your checking account where you might be tempted to spend it.
Keep track of how your down payment fund is growing. Make sure you're staying on target with your monthly contributions.
This can help keep you motivated as you see your down payment fund grow. It can also help you change course if you aren't saving enough. If you see too little progress, you may decide to make other spending cuts. Or you may consider picking up a side gig and saving the extra income.
To save for a down payment on a house, take these seven steps:
Generally a high-yield savings account is the best place to put money you're saving for a down payment.
A high-yield savings account offers a more competitive rate of return than traditional savings accounts or checking accounts. Your money remains accessible. If it's in an FDIC-insured account, there's no risk of losing it. And you're separating your savings from your checking account, where it's more likely to be spent.
Other options exist. These include money market accounts, CDs, or bonds. Most have downsides, such as an inability to access your money exactly when you need it without incurring penalties.
The amount you'll need to save for a down payment depends upon:
Traditionally, a would-be home buyer was required to put down 20% of a home's value. Now, it's possible to buy a home with just 3% down. Certain kinds of government-backed loans, such as VA loans, may even let you purchase with no down payment at all.
Still, a larger down payment can lead to a wider choice of loan options. It can also help you reduce your monthly payment since you avoid private mortgage insurance. And it can reduce the chances you'll end up owing more than your home is worth. As a result, when possible, aim to put at least 20% down.
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