Save for the Mortgage Downpayment
Budget, Set Goals, and Pick the Right Savings Vehicle
5% down plus closing costs can be a lot of money for most home buyers. Smart saving, slow and steady, can help you get into a new home sooner than you think.
A reader recently asked about saving for the mortgage down payment. People often overlook the time and effort it takes to save the 5% down payment, plus additional closing cost fees like inspections and appraisals. While it may be an easy exercise on paper to decide between buying and renting, in real life the decision is dictated more by financial means.
Set a Goal and Start Saving Now
Most people get overwhelmed when they consider how much cash they will need to bring to the closing table. If the initial number seems unattainable, break it down into smaller amounts that you can save weekly or monthly. The most important piece of this process is to have a goal. If it helps to pick out a house or a price target, do that. When picking out a price target, your goal should be approximately 8% of the value. This will provide enough capital for the down payment and the closing cost.
Be very conscience of your spending during this period. Anytime you receive a large windfall of cash, like a tax refund or a bonus, consider adding 50% or more of it to your savings. Additionally, let other people know that you have begun the savings process. Around the holidays ask for things that will be beneficial to your new home. You also may want to consider not exchange gifts with your significant other, instead contributing that additional money to the new house fund. These suggestions may seem harsh, but it takes a lot to save up for the down payment on a new home. Remember, every year you wait to purchase a house, the price goes up even more.
Make a Budget
People are always amazed at how much they spend when it has been recorded. Try putting more purchases on your credit card (and paying them off every month). This helps you track your spending because you get a statement every month. Don’t just write a check for the full amount of the bill, critically look at where your money is going and actively make a commitment to change your spending habits.
Make sure you are managing your credit during this process as well. Many people take two or three years to save up for their first down payment. This is more than enough time to get your credit in order. It is helpful at the beginning of this process to get with a mortgage broker to see what you need to do to qualify for a loan. This is a free service and can prevent any nasty surprises when its time to make your first purchase. Check out these two articles on Managing your Credit and Credit Repair Tips for more information.
Choose the Best Savings Vehicle
Make sure you get the most out of your savings accounts. Consider putting your money in a one year Certificate of Deposit (CD). The one year CD provides about two times the savings rate of a standard savings account. Another idea is to consider an ING savings account. They have great rates and your money can be accessed within seven days. These savings accounts can really augment your savings efforts.
With all of these tips, you should be able to start saving for your first house today. Good luck!
