4 Essential Tips to Saving for a Down Payment for a Home
09 06 2017
Buying a home or another piece of real estate is typically the largest single purchase a person will make in his or her lifetime. Often the first thing you should consider is how much money you are going to put down for a down payment, or the amount of money you spend upfront to purchase a home. Typically, this amount is combined with a loan to fulfill the total purchase price of a property.
The down payment is as crucial to buying a home or commercial property as knowing all ins and outs of real estate funding or basic real estate lingo, and it indicates to the lender that you are serious about the property you’d like to purchase. While you should always consult your decision with a financial advisor or other professional attuned to your unique financial situation for any real estate opportunity, here are a few helpful tips of what to keep in mind when saving for a down payment.
1. Determine What You Can Afford
When considering which qualities you’d like from a home, you need to determine what you can afford. You should talk with your real estate agent, advisor, and your partner or family about what you want out of the home, neighborhood, school district, etc.
The cost of a house can range from tens of thousands to many millions of dollars, and what you can afford is based on your annual income and current savings, which could include non-retirement assets in your investment portfolio. Home calculators (like this one from Zillow) can be helpful to getting an idea of a price range that makes sense for your financial situation, but you should also speak with a mortgage lender to confirm the budget you’ve set lines up with the mortgage you qualify for. You don’t want to purchase a home that is above your price range, as there’s a greater risk of defaulting on the loan. Find a price that you’re comfortable realistically spending on a home and stick to it.
2. Create a Savings Plan
Once you know how much can you afford to spend on a home, it’s time to start saving! Your financial advisor can offer a healthy set of recommendations for saving, but one popular option for most people is to save a portion of their paycheck each pay period. Saving your money in a savings account or a certificate of deposit are often popular options, each with their own benefits. For example, while a certificate of deposit (CD) tends to offer slightly higher interest rates than a savings account, the saver must agree to keep the money in the account for a longer period.
Additionally, it’s wise to consider when, exactly, you’re looking to buy your home. If it’s in five years, you may need to save more quickly than someone looking to buy in the next ten years. In both instances, a financial professional can help you find your way and make wise decisions as you save.
3. Be Flexible
Flexibility is important to any savings plan. There are likely to be other expenses that could accumulate over years of saving, such as major car repairs, medical expenses, or the temporary loss of a job. Any of these could potentially derail your savings goal each month, so most financial advisors recommend having an emergency fund where you can save three to six months of necessary expenses in the event of a personal financial dilemma.
This emergency fund isn’t just helpful while you’re saving for a down payment. When you have a house, there will be sudden repairs you’ll have to make, and your emergency fund is there to help you with those unexpected large expenses.
4. Make a Budget
Saving a large sum of money isn’t easy, so it’s a good idea to create a budget with a savings goal in mind. This will help you understand how much you are spending each month and whether your savings goal is doable; you may need to earn additional income, cut back on expenses, or both. You should do your best to stick to your monthly budget and you may just be surprised how quickly the savings adds up! (Oh, and by the way – budgeting is another part of saving where your financial advisor can be particularly helpful.)
Buying a Property: The Bottom Line
You don’t have to be a real estate investor to know saving for a down payment takes time. In a sense, the practice of saving money for a down payment reflects the kind of monthly money allocation required for homeownership. The more money you put down, the more likely you’ll be able to negotiate for the lowest possible mortgage rate. Do your homework ahead of time, meet your monthly savings goal, and talk to a professional if you need some extra help. The key to turning your dream home into a reality is preparation.
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