Hey there! Are you looking for ways to save for a down payment on a house? If you're a potential home buyer buying your first or next home then you may know that placing a larger down payment down on a house will lower your monthly payments and, if you place 20% or more down, you'll avoid PMI (private mortgage insurance), which can cost you a lot of money over time.
In this post, I'm going to talk about 7 excellent ways to save up for a down payment for a house so that you can get the home of your dreams. Let's jump right in!
1. Figure Out How Much You Need And By When
Figuring out how much money you'll need, and when, for buying your home is pretty obvious, right? Well, it can be a bit trickier than you might initially think. A pretty standard down payment is 20% of the cost of the purchase price of the house, and this will allow you to avoid paying PMI. You'll also need closing costs, unless you plan to roll those into your mortgage.
You also need to figure out when you plan on buying a house. Is it in 2 years? 5 years? 10 years? Your timeframe will determine how much you need to save and how aggressively you'll need to save as well.
Will you put 20% down or 3% down, or somewhere in between? All of these factors go into consideration when determining how much you'll need. It might make sense to put 3% down so that you can get into your house faster (less money needed to save), but your monthly mortgage payment will be higher, plus you'll pay PMI. If you save up 20%, your monthly mortgage payments will be lower, and you won't have PMI, but you may spend several years saving up the money.
2. Transfer Money To Savings Each Month
If you haven't opened a high yield savings account specifically for your down payment, do so now so that you can separate your money and start saving immediately. I use CIT Bank's Savings Builder Account for all of my savings needs as they provide added incentives in the form of higher interest payments when you save every month. This is the perfect account for putting down payment money in.
An effective way to transfer money to savings each month is to automate it via an automatic transfer. This can be set up in your checking account where you make a recurring transfer from checking to savings.
You may want to avoid using an investment account as investments are less stable. If you don't mind taking the risk, you can grow your money much quicker in the market, though you may also find that your money doesn't reach where it needs to be on time if the market dips right before you need your down payment.
You use certificates of deposit to save for your down payment if you know when you need the money by. Certificates of deposits give a guaranteed return but lock up your money while you earn. If you know you need your money in three years, you could get a 12 month certificate of deposit each year for three years.
Overall, there are many ways to save money for a down payment on a house, and the best way is to simply do it regularly.
3. Cut Back On Expenses
Cutting back on expenses is a great way to boost your savings for a down payment on your upcoming home purchase. Here are some basic ways to cut back of your monthly household expenses:
- Eat out less (you can save over $100/month with just this!)
- Negotiate your cable and internet bills
- Go to The Zebra and lower your auto insurance
- Cancel unused subscriptions
- Pay off credit card debt
- Re-examine your spending habits
Additionally, budget like you have a low income. By budgeting as if you're broke, you'll maximize your savings rate to help you have the money to buy a home quicker.
4. Get A Side Hustle Temporarily
If you have available time in your week to work extra, get a side hustle to save money for a down payment for your house. Even if you only have time to do a side hustle one day a week, you could still bank a few hundred dollars a month.
My friend drove for DoorDash while she and her husband were saving for a down payment for their first home. There's pretty much a side hustle for everyone out there and you certainly don't have to do it forever.
Remind yourself that the more money you put down, the less money you have to pay every month and the more house you can buy, provided you want and can afford a bigger home.
5. Live On A Tight Budget For A Year
Real estate is one of the most expensive purchase you'll make. When saving for a down payment for your new home, you'll want to maximize your savings by minimizing your expenses. Live on a tight budget, that is, cut out everything you don't need, for a year.
When my wife and I were saving for a house, we cut back on so much that we ended up saving over $2400 in a year simply by not eating out as much. We coupled that savings with saving money from other avenues, we were able to buy our first home relatively smoothly.
Living on a tight budget has long term benefits such as also teaching you how to live below your means. Living below your means enables you to live a financially healthier life overall!
6. Save Your Tax Refund
Your annual tax refund can boost your down payment savings if you receive one. Instead of spending this money, toss it into your high yield savings account and save it for your upcoming home purchase.
A friend of mine received a few thousand dollars from her and her husband's tax refund and used the money as part of their down payment towards their very first home, which they purchased this year.
It's tempting to spend your tax refund as it's generally a nice chunk of change, but when you're saving for a down payment for your house, don't let temptation get the best of you; save the money instead.
7. Borrow From Your Retirement Accounts
You may be able to take money out of your IRA, such as a Roth IRA, to fund the down payment of your house. While IRAs come with penalties for early withdrawal, paying for a first-time house purchase is an exception where you can withdraw without penalty in most cases.
If you don't have an IRA and instead have a 401(k), you are able to take out a loan in order to avoid penalties. This may or may not ultimately be the best decision when you're already taking out a mortgage, however speaking to a financial advisor will help answer this question if you are considering it.
Where To Save Money For A House Down Payment
When saving money for a down payment, you want to find a high yield savings account or money market account where interest rates are high. If you want to grow your money quicker and have a higher risk tolerance, consider index funds or mutual funds in a brokerage account.
I personally prefer a savings account because I know my money is 100% safe and will grow predictably.
Wrapping It Up
Saving for a down payment on a house is generally a long process, however the reward is well worth it. Whether you decide to go with a small down payment or 20% or more will be the leading factor in how much you'll need and how long it will take. If you're a first-time homebuyer, check out these first-time homebuyer tips to help you land your dream home.
What were/are some ways you saved up for a down payment on your current or next house?