Written By: Tamara Kukainis CFP®
Buying a house is one of the most exciting and stressful times in so many people’s lives. For many individuals and families, buying a house is at the top of their financial goals. The question is not always deciding on whether buying a house is right for you (see our last blog post on buying vs. renting), but rather – how am I going to afford this house? Once the buying decision has been made, reality sets in as many other questions bubble to the surface.
- How much do we need to save for a down payment?
- When should we buy the house?
- How do we go about saving for this purchase?
- What mistakes do we need to avoid during this process?
We have done our best to simplify this process in a practical and efficient way. See our steps to saving for a down payment on a house below. Let us know what you think!
DETERMINE HOW MUCH YOU NEED FOR A DOWN PAYMENT:
The industry standard for a down payment is roughly 20% of the purchase price of your home. For example, if you want to buy a $300,000 home it will cost you $60,000 up front. Some lenders will allow you to put as little as 3% down for your first home. In this example, that brings your down payment to $9,000. For many lenders, if you put less than 20% of the purchase price down, you will be required to pay Private Mortgage Insurance (PMI). You will often be required to pay PMI until you build up to 20% equity in your home. To get an idea of the costs of PMI, try using this PMI calculator. Mortgage companies offer several different types of mortgages, some of which give you money towards your down payment. Check out FHA’s website here, which offers great education and knowledge for mortgage options for First Time Homebuyers.
DETERMINE YOUR TIME FRAME:
You have decided on the down payment you will need for your house. Now you need to set your time frame. Pick a date on your calendar and stick to it! Determining that date in the future is critical to the success of your savings goal. If it helps, set monthly or quarterly reminders that let you know you are getting closer to your purchase date. Check out this article about some of the best times of the year to buy a home.
OPEN A SEPARATE HIGH YIELD SAVINGS ACCOUNT:
It is important to separate this savings goal from your other savings goal (i.e. an emergency fund). Check out Capital One 360. There are no minimums to open an account, the digital experience is excellent, and the yield is competitive. If you prefer to stay with your current bank, make sure their Annual Percentage Yield (APY) is competitive compared to other banks.
SET UP AUTOMATIC TRANSFERS TO YOUR SAVINGS ACCOUNT:
This is probably the biggest differentiator between success and failure in this process. You are way too busy to remember to go in to your checking account every month and transfer money to your new high yielding savings account. Make it automatic. Set up an ongoing monthly transfer for the duration of your goal and treat it like every other bill you have.
Let’s use our $300,000 home value example. You have decided you want to put 20% down ($60,000) and want to buy your house in 3 years (36 months). So now you need to save $1,667 a month for 36 months assuming you have not saved anything yet. Set that up as a monthly transfer from your checking account to your new savings account and forget about it! With your new savings account, you will have the added benefit of interest payments (unlike a lot of traditional checking accounts).
TAKE SOME SHORTCUTS:
- Save any windfalls you get: The 2 most common examples we see are company bonuses and tax returns. Transfer these windfalls into your savings account and put that money to work for you and your goals.
- Skip the big vacation: This one might hurt a little but it could really help relieve the cash flow burden of large upfront expenses.
- Lower bad debt: If you have outstanding credit card debt, take care of that first! The interest will eat in to your accounts over time and can cause some serious cash flow problems down the line.
- Be wary of the stock market: The stock market may not be the best place for short term savings. While stocks have proven to be one of the best long term investments you can buy, short term success can be extremely volatile.
TRACK YOUR BUDGET:
No matter where you are in the Home-buying process it is vital to have an organic budget. We will review some key strategies to create and track a successful budget in our next post. Stay tuned!