Saving for a house can be a long and challenging process. Certainly more challenging than the process of purchasing a new home. Both because of how much money you actually need to save and because of the time commitment needed to save that large amount of money. In this post, I am going to give you an idea of just how much money you need to save for a house (and why saving more makes sense) as well as how to get over the hurdle of the time commitment involved with saving such a large amount. I’ll even touch on a few ways to help boost your saving. Let’s get started.
How Much Do You Need To Save For A House Down Payment
Depending on who you get your mortgage through, the amount you need to put down on your house will vary. It can be as little as 3.5% of the purchase price to all the way up to 20% of the purchase price. Just how much is this? If you are looking at a house worth $200,000 then 3.5% would be $7,000. For a 20% down payment, you are looking at needing $40,000.
Both of those numbers look scary and will take time for you to save. Many might focus on the $7,000 and just try to save that amount. However, you should really try to save at least 10% to put down on a house. That would mean saving $20,000. Why do I recommend this amount? For starters, it gives you some safety should housing prices decline. I doubt we will see a collapse in the housing market like we just witnessed, but there is no guarantee that housing prices won’t drop for a year or two.
If they do, they typically drop 2-4%. By having 10% equity in a house from the start, you protect yourself on the downside. Additionally, the higher the down payment you make, the lower the monthly mortgage will be.
Many home-buyers overestimate how much they can afford when it comes to a monthly payment. They forget about needing to furnish the house, or buying the grill or patio furniture or the lawn mower. All of these things add up. Trust me, I’ve been there.
Another reason why a lower monthly payment is better is because it is more manageable. No one expects to lose their job or be out of work for a while on disability. But these things happen. The lower your monthly payment, the more likely it is that you can continue to pay it, even in tough times.
Issue With Time
Saving between $7,000 and $40,000 isn’t going to happen overnight. It is going to take time. In many cases, people will take too much risk with their savings to try to earn a higher return or will just give up saving altogether. You don’t need to do either of these.
To save for your house down payment, the first thing you should do is find a high yield savings account online. While the interest you earn from this account won’t be much, it will be better than what traditional banks offer. Once you have a decent amount of money saved, you can look into other avenues for saving your money.
Once such way is to build a CD ladder. This works by investing your money in a 6 month CD, a 1 year CD and an 18 month CD. This will allow you to earn a higher return on your cash and still keep the principal safe.
But before you do this, you need to know what your time frame is. If you don’t need the money for 3 years, you could skip the 18 month CD and invest in a 2 year CD instead. The key is to vary the time frames up so that in the event interest rates rise, you can take advantage of higher rates.
Additionally, you could look into short-term bonds. For most however, this is not a smart move, simply because their time frame is so short and you can lose money in bonds. If you do go this route, be certain that you only invest in short-term bonds. This will take away some of the interest rate risk and as a result, will limit your losses.
Finally, the stock market should not be a place for you house down payment. The stock market is for long term investing, meaning only for investments you plan to hold for at least 5 years.
How To Save More Money
In order to save for a house down payment, you need to find creative ways to save more money. The more you can save, the more your money can compound upon itself and grow faster. Here are a few ideas:
- Get a 2nd job – it’s not for forever, just a few months to boost your savings
- Use your tax refund to boost your savings
- If you have a skill, offer it up on Fiverr
- Go around your current house or apartment and sell the things you don’t need
- Find ways to earn cash back when shopping online
- If you make things, consider selling on eBay or Etsy
- Find ways to cut expenses: car pool, shop insurance coverage, stop eating out
There are many ways to either increase your income or cut your spending. The more you are willing to sacrifice, the more money you will save and therefore, the faster your down payment fund will grow. Remember, whatever you do doesn’t have to last for the rest of your life. Do it for a year at most, just to increase the amount you are able to save for a down payment.
Saving for a house down payment can be challenging. Both the amount of money you need to save and the time it requires to save this much money can make the goal seem unattainable. But it is attainable if you just work at it. Many have sacrificed before you to own a home and many will after you. It can be done. You just need to have the patience and the focus to achieve the goal.