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The Benefits of Saving for a Home Early
Even if home-ownership isn’t on your radar yet, it’s time to start saving now if you intend to one day own. It’s easy to underestimate just how much it costs to purchase a home, because the total amount is always more than the down payment and the mortgage. Prospective homeowners need to consider closing costs, attorney fees, and miscellaneous payments, such as the home inspector’s bill, and if you choose to put down less than 20% on the home, you’ll have to spring for private mortgage insurance.
If these costs seem daunting, don’t despair! They are easily manageable if you have a financial plan in place long before you actually need to put down any payments. As such, saving for a home is always a case of “the sooner, the better”.
Determine How Much You Have and How Much You Need
Your down payment is the first financial hurdle you’ll need to overcome on your road to becoming a homeowner. Start the process by figuring out early on exactly how much you’ll need to put away. A down payment of less than 20% will result in added costs, so if possible, make it your goal to save 20% of your future home’s purchase price. In order to figure out approximately how much money that is, consider your buying bracket. If you’re looking at homes in the $300K range, you’ll have to put away $60K. That’s a lot, but it is doable.
Cut Down on Your Spending
One way you can start working toward that down payment budget is by trimming your budget as much as possible and putting those savings into your down payment fund. Take a good look at your lifestyle and decide what you need and what you want. Postpone as many of the latter and stash away the money saved. Exercise at home, instead of paying for a gym. Brown bag your lunch instead of ordering expensive meals out.
Another good place to reduce your outgoings is by re-evaluating your rent. If your apartment lease is coming up for renewal, consider finding a cheaper place to live, unless you already have a great deal. Sometimes it’s just a matter of settling for a less trendy neighborhood. If there aren’t as many great restaurants and shops around, that’s a plus, as you’ll be less likely to blow your budget on a spur-of-the-moment dinner decision. If you save a few hundred dollars monthly on your rent, that difference will quickly start adding up in your down payment account.
Increase and Stabilize Your Savings
According to a recent survey into America saving habits, 57% of Americans have less than $1,000 in their savings accounts. If you’re in that majority and don’t have much of a nest egg put away for your first home—that’s OK! No matter how small the amount may seem, you’ve got to start somewhere. The key now is to instigate a savings plan that will help you grow your existing funds into a down payment for your very own home.
Set a budget based on your income to save a certain amount annually in the coming years—$12K per year, or $1K per month, will get you to that $60K down payment goal in five years. Or if you receive an income tax refund, bonus or any amount of money you didn’t expect, don’t go out and celebrate. Instead, deposit the money in your dream house account.
Most importantly, where you keep your money matters just as much as how much money you’re saving. Opening a high yield savings account specifically for your down payment is a great way to get the most mileage out of your savings. You’ll receive a higher interest rate than in standard savings vehicles, and that extra, compounded interest adds up over time. Best of all, it requires no work on your part—just keep depositing money and your fund will grow all on its own.
At Citadel, we’re with you for every stage of your homebuyers journey. We can help you save for a home and then, when you’re ready to buy, help you arrange mortgage financing. Whatever your financial needs, contact Citadel today.