That beautiful house in your neighborhood finally went up for sale. You know the one – corner lot, mature trees, that stunning wrap-around porch, and those majestic windows! It’s your dream home, and there it is … ready for you to make your offer. Except for one small problem: you didn’t save money for a down payment. Suddenly, the dream is slipping through your fingers.
But wait. Let’s rewind. Months (or even years) before that home ever goes on the market, what if you’d been saving? The house goes on the market. Those trees! That porch! But this time, instead of realizing your dream was nothing more than wistful fantasy, you have enough money saved for a house and then some. You thank years-ago you for making the smart decision to start saving. Now, your dream home is a reality.
With a few small changes in your spending, you could save enough money so when the right house comes along, you’re ready. Let’s start by figuring out how much money you’ll need.
How Much Should I Save for a House?
You’ve probably always heard that you need 20 percent down when buying a house. While that’s a good rule of thumb, it isn’t entirely true. Having 20 percent down would save you from having to get private mortgage insurance (PMI). This insurance protects the lender and mortgage investor if you default on your mortgage. So, while you may need to pay for this insurance, you can buy a house for very little down – even as little as three percent. The trick is figuring out how much house you can afford, then determining how much you’ll want to put down from there.
Be realistic. If you are struggling with your current rent payments, you wouldn’t want your mortgage payments to be much more than that amount. Review your budget and determine how much per month you can afford to pay. Make sure you factor in monthly expenses like credit cards, car payments, utilities, and groceries. Your utility bills will likely increase if you are currently renting an apartment. Generally, it is suggested that apartment renters budget $240 per month for utilities like electricity, water, gas, and internet. For homeowners, that increases to about $400 per month.
Next, research the neighborhoods where you think you’ll want to buy a house. If, for example, homes in your desired neighborhood sell for an average price of $300,000 and you want your mortgage payments to be around $1,200 per month, you’ll need to have a down payment of about $30,000 (depending on the interest rate and the length of the loan). While it sounds like a lot, remember: the more you pay in the beginning, the less you’ll need to borrow and the less you’ll have to pay over time. Putting more down could also lower your interest rate. Remember to factor in other costs as well, such as agent fees, taxes, and closing costs.
Pay Down Your Debt
If you have a lot of credit cards and they all have a balance, start working on paying those off. Even reducing your balance by $1,000 could lower your interest rate and save you $100 or more per year on interest. Start with the credit card with the lowest balance and concentrate on paying that off. Pay the minimum on the rest of your cards. Once that card is paid off, pay what would have been the minimum for that card on the next card, in addition to the regular minimum payment. Keep doing this until all of those minimum payments are going toward your largest credit card balance. This is called the “debt snowball,” where you eliminate one debt at a time and apply that money to the next debt.
Examine your budget and find other monthly payments you can eliminate – for example, subscription services (especially if they are automatically deducted from your account). If you rarely use it, ditch the gym membership and work out at home or at a local park with a jogging trail.
Get Acquainted with Your Kitchen
Whether it’s ordering from your favorite restaurant or buying fast food on your lunch break, you could be spending way more on food than you realize. That $20 meal delivered from your favorite restaurant would have cost you about $4 to cook at home. On average, it’s about five times more expensive to order from a restaurant than it is to cook the meal yourself. The leftovers from your home-cooked meal will make a great lunch – just toss the leftovers in a Tupperware and pop it into the breakroom microwave at work. (Yes, even if it’s fish. Your co-workers will forgive you eventually.)
Before heading to the grocery store, make a list. Plan your meals for the week, determine which ingredients you’ll need, and shop from that list. Grocery stores are good at getting shoppers to impulse buy, so make sure you only get what’s on your list. If you can avoid it, don’t shop on weekends. Instead, try to do your grocery shopping in the middle of the week – that’s when stores have the best sales. If you use coupons, you can save even more.
Find Ways to Cut Expenses
While you may find joy in buying trading cards or lottery tickets, you’re probably spending more on these habits than you realize. This also applies to other habits like smoking or drinking (whether it’s beer or diet Coke). Maybe you are a chocolate fiend and have a subscription to an online chocolatier that sends you a box of delicious goodies once a month. You don’t have to give up these habits completely, but setting a limit for yourself (say, only one box of cards per week instead of five) will amount to more money than you may realize. Take that money and put it into your savings account.
Another great way to save money: unplug your electronics! Just unplugging your appliances and other devices when they aren’t in use can save you up to $100 a year. While you’re at it, switch out those old lightbulbs with energy-efficient ones, make sure you are replacing your air filters regularly, and save water by taking shorter showers and turning off the sink while you brush your teeth.
Save Money Automatically
Check and see if your bank will allow you to set up an automatic withdrawal every payday. Since you are saving money by paying down your debt and cutting expenses, this is a painless way to increase your savings. Even if it’s just $25 per paycheck, it adds up fast. Some banks or apps will round up your purchases and put the difference in your savings account, as well. This is another great way to save money for a house without even realizing you’re doing so.
If you are currently renting and expect your mortgage payment to be higher, subtract your rent payment from what you expect to pay for your mortgage (for example, $1,200 mortgage payment – $900 rent payment). Put that extra $300 a month directly into your savings account as if you were paying your mortgage. This will help you to determine if you can really afford that mortgage payment, and it will quickly increase your savings.
While it may seem overwhelming to save up a large down payment for a house, just a few minor changes in how you spend and save will make all the difference. When you’re finally unlocking the front door of your new home for the very first time, it will all be worth it.