Searching for a home can be an exciting process. However, once finding your dream home, saving up for a down payment can feel overwhelming. Find out more about how much you should be saving for a down payment and tips that can make the house-hunting process go seamlessly.
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How much should you save for a down payment?
In short, a down payment is a sum of money that a buyer pays to ensure the purchase of an expensive good. When it comes to purchasing property, a down payment is typically a percentage of the home’s price ranging from 3% to 20%. This is percentage dependent on whether this property will be the buyer’s main residence or not.
However, one should aim to set aside around 20% of their desired home’s purchase price for a couple of reasons. Not only does this usually cover the upfront down payment fee but, the more cash you put down, the smaller the loan you’ll need and the less interest you’ll pay.
6 ways to save for a down payment
Saving can be easy when a solid plan is enforced. Use these 6 saving strategies to help you start working towards your future down payment.
Create a budget
A good place to start is by building an in-depth budget. By creating a budget, it helps you control your spending habits and track your expenses. Overlook your bank statements so you can dictate where most of your money is going and what spending habits are unnecessary.
First, consider how much you spend on necessities, such as rent, groceries, or loans. Then, look into how much you are spending on non-essential items, such as eating out or entertainment.
After looking over these categories, set a realistic plan for how much you wish to spend on each of them. By setting this cap of how much you can spend in each category puts yourself in control of your spending habits. Additionally, it is important to note the more you cut down on unnecessary items and save now, the quicker you will reach your down payment goal.
Automate your savings
Sometimes putting money away to save can slip your mind. However, with automated savings, it is a great way to keep yourself in check to reach your goal. Prior to automating your savings, decide how much you wish to save each month.
Once you have decided on this amount, you then have to determine how frequently you wish to make these withdrawals. After you resolve these two factors, contact your bank to authorize a monthly, weekly, or daily withdrawal from your primary account into your savings. Additionally, some bank’s provide this service on their mobile apps to make this process even more seamless.
Start lowering your debt
Lowering your debt may not be your first idea when it comes to saving up for a home, but it is crucial to the process. By having less debt, you are putting yourself in a better position to be a more favorable mortgage candidate.
Lenders tend to look at a mortgage applicant’s debt-to-income ratio. When you have a large amount of debt, you may have to pay a higher interest rate on your loan and have a more expensive down payment requirement.
Look into a certificate of deposit ladder strategy
A Certificate of Deposit (CD) Ladder is a saving strategy one uses to take advantage of high interest rates. How this works is one spreads an equal amount of cash across multiple CDs with different time intervals. Once these short-term intervals matured, one can reinvest into the other long-term CDs for a higher yield or cash it out.
This can be exemplified by one investing into two different CD accounts with $1,000 each. The first account could be a one-year CD with a 0.60 APY and the second account could be a two-year CD with a 0.85 APY. Once the one-year CD matures, you can reinvest this account into the two-year CD since it has a higher interest rate and therefore a higher rate of return.
This strategy is beneficial to those who have a long-term plan since it guarantees a certain rate of return while allowing you to have easy access to your money.
Pick up a side hustle
If your goal is to quicken this saving process, look into picking up a side hustle. Increasing your income can substantially help when it comes to making financial progress. Search for side jobs that specifically have low overhead and opportunity to make some profit.
Some of these jobs could include freelancing, babysitting, food delivery, ride-hailing, or consulting services. Additionally, you could look into selling items that are no longer of use to you on platforms such as Facebook marketplace. If any of these options align with your work schedule, it may be a good way to make extra cash on the side.
Put a pause on your retirement savings
If you are putting a large portion of your income towards your retirement savings, it may be a good idea to redirect that income towards your down payment. Additionally, first-time homebuyers can withdraw up to $10,000 in their IRA without penalty for their down payment.
However, you can still be taxed on this amount. Prior to withdrawal, take into consideration the tax amount and whether it will be a good financial decision towards your savings goal.
Why not start saving now?
Although it may be a daunting process, with the right saving strategy you will be able to pay your down payment in no time. Start saving for your dream home by looking over your spending habits and expenses to see where you can cut down on non-essential purchases.
Creating a budget doesn’t have to be a time-consuming process, you just have to get started and stick to it!
What is a down payment?
A down payment is a sum of money that a buyer pays to ensure the purchase of an expensive good. Down payments are typically used in real estate transactions during the home buying process.
How much should I save down payment?
One should save up to 20% of the purchase price on their desired home. By paying this amount, it additionally helps you decrease your loan payment and interest rates.
What is the point of a down payment?
The down payment is a percentage of the total purchase price and it is used to ensure that the buyer will eventually pay the remaining amount.