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By Maggie Tomasek
If you’ve been pondering whether it’s the right time to stop renting and start owning, you’re probably thinking about just how much money you’ll need to save to make homeownership a reality.
But just how much do you need to save for a down payment on a house? And what can you do to reach your savings goal? We break it down for you.
First up, here are three steps to figure out your savings goal.
Most experts recommend spending 28% or less of your gross monthly income on housing expenses, which include your mortgage, taxes, association fees and insurance. You should also determine your monthly budget – if you don’t have a budget, check out the 50/30/20 budget method to quickly create one – and then use a home affordability calculator to determine how much house you can afford.
Traditional mortgage lenders used to require you to put down 20 percent to buy a house, but there are more mortgage options now. Why are there more options? It can be difficult to reach that 20 percent savings goal, depending on your timeline and your financial situation. Some lenders offer programs with 5 percent, 3 percent or even zero percent down options. Buying a home with less than 20 percent down can broaden your choices, but it’s important to ask questions and compare programs and loan qualification requirements as you weigh the pros and cons to decide if it’s the right decision for you. So, let’s say you calculated that you can afford to buy a $300,000 home and want to put down 20 percent. You would need to save $60,000 for the down payment.
Saving for a down payment on a house is only part of the picture. You’ll also have closing costs, moving costs, appraisal and inspection fees to save for, and depending on how much you put down, you might have to account for private mortgage insurance (PMI). Also, you may need to buy new furniture to fill the extra space that comes when you upgrade from a one-bedroom apartment to a two-bedroom house. You won’t want to completely tap out your savings to buy your home. You’ll want to make sure you still have some money on hand for those unexpected “joys” that come with new homeownership, like replacing a furnace or fixing a leaky pipe.
Now that you know how much you need to save for a down payment and other expenses to buy a home, here are some tips to help you reach your savings goal.
Open a high-rate savings account dedicated to your savings goal and keep it completely separate from your other accounts, so you’re not tempted to dip into it. You could break it down even further, with accounts for your down payment and purchase costs and another account for your post-purchase costs like new furniture or the many hardware store runs you’ll be taking as a new homeowner.
One tip Alliant’s mortgage experts recommend is to simulate setting aside the amount of money you’d be spending on housing costs when you buy your new home in your new home savings account (basically, the difference between your rent and those future housing costs, including things like your mortgage, higher utility bills, parking etc.). This will give you a chance to practice “paying your mortgage.” If you struggle to make this work for 3-6 months, then you know you may have missed the mark when calculating your home affordability. If saving that extra money doesn’t put a strain on your budget, you’ll know you’re on the right track. Plus, the money you have set aside “paying your mortgage” will fund your home savings account.
Going back to our earlier example of putting down 20%, let’s say you need to save a total of $70,000 for your down payment, closing costs and other immediate costs of purchasing a home. If you’re starting from zero and you want to buy a home in two years, you would need to save $2,916 per month. Looking for more savings tips? Check out these six smart ways to save more of what you earn.
Having debt, whether it’s student loan debt or credit card debt, makes it more difficult to save, and it can also make it more difficult to qualify for a low-rate mortgage. You might want to consider paying off loans early or consolidating your debt to help you save money, improve your credit score and simplify your life.
The operative word here is “temporarily.” If you’re close to retirement, this probably isn’t a great strategy for you. But if you’re young(er) and already contributing to an IRA or 401(k), think about instead putting that money in savings for your new home. This can help you grow your savings faster. Remember, this is just a short-term tactic; as soon as you have saved enough to buy your home, start up your retirement savings again.
Maggie Tomasek is the marketing manager of special projects at Alliant. She began her career as a journalist for newspapers in Utica, N.Y., Des Moines and Cincinnati before moving to Chicago in 2009. Maggie is an eight-time Chicago Marathon finisher and a lifelong creative writer with a passion for comedy. Her mom instilled in her a great sense of fiscal responsibility, and her big sister told her to throw that responsibility out the window every once in a while in the name of life experience. So far, that combination of financial advice has worked out pretty well for her.
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