The thought and process for saving a down payment to purchase a home may seem overwhelming at first. Never fear, we’re here to help. Breaking the process into small, actionable pieces might just help you afford a home sooner than expected.
- Calculate what you can afford
Your first step in saving for a down payment includes deciding what you can afford what you are looking for in a home. Start by making a list of basic requirements including size, location, school districts, etc. When determining affordability, calculate the potential monthly payment plus homeowners’ association fees, taxes, insurance, utilities, maintenance and other related expenses. We recommend using one paycheck to cover all homeowner expenses if you’re one half of a dual income partnership.
- Determine how much a down payment you need
We recommend saving at least 20 percent of the purchase price. Lenders require 20 percent or more down for a conventional loan. Although, other loan options exist which require much smaller down payments, some as low as 3.5 percent. However, these loans require that you pay mortgage insurance. This insurance protects lenders if borrowers default on their loans. Once you know the price range you can afford, use this down payment calculator to get started saving.
- Create savings plan
One tip to help you save includes automating portion of your income. Options vary from choosing a fixed amount to choosing a percentage from either your paycheck or checking account. Whichever option you choose, deposit the portion into a separate cash savings account. You also can try the $5 bill savings plan where every time you receive five dollars as change you set it aside. Also, consider setting aside raises, bonuses and tax refunds. Combining all of these tips will help you get into your new home that much quicker.
- Build your equity
After all of the scrimping and saving, you deserve a congratulations for making your home purchase, but the benefits don’t stop there. As you make your mortgage payments each month, you own more and more of the property that builds equity over time. Equity that you can later use for a larger down payment on your next home or for an investment property. Either way, building equity ultimately builds your wealth.