Even if you’re not planning to buy a house for several years, you’ve probably started thinking about how to save for the down payment. This is not the same as saving for retirement, where the funds you stash away won’t be accessed for many more years, your down payment is a large sum of money that you’ll need to access in the near future.
In these steps that follow below, we’ll show you how to start saving for your first home, the smartest way possible.
First, you must know how much you’ll need to save. Sitting down with a Realtor or a mortgage lender who will let you know how much of a mortgage you can qualify for is a good place to start or you yourself can begin by following a few simple calculations.
Calculate A Feasible Budget & Savings Goal
In general, your housing expense should not exceed 28 percent of your stable monthly income. That means if your income is $5,000 per month, you can safely allocate $1,400 of that ($5,000 x .28) to a future house payment.
The $1,400 will include mortgage Principal, Interest, real estate Taxes, homeowners Insurance (or PITI), and homeowner’s association (HOA) dues, if any.
Mortgage rates vary but for our example, 4.5 percent, this will translate into a mortgage loan amount of about $177,500.
To arrive at the amount that you can afford to pay for a house, you’ll have to add the down payment on top of that $177,500. In the tightly regulated mortgage lending market today, you should expect to make a 20 percent down payment on your house. In order to avoid paying PMI – Private mortgage insurance to the lender, it is recommended and generally expected to make a 20 percent down payment on your house. It is not a requirement; however, but this will give you the most benefit to pay less in interest.
You can certainly put down less, but you will likely be paying a higher rate of interest and, if you have any kind of credit issues, you may not be able to get a mortgage at all.
So, let’s work with our example of a mortgage for $177,500, and making a provision for a 20 percent down payment, we can calculate the actual down payment dollar amount this way:
$177,500 divided by .80 = $221,875, minus the $177,500 mortgage loan = $44,375, or rounded up, $45,000
By Rounding the numbers up, this means you will be purchasing a house for $222,000, with a $177,500 mortgage, and a down payment of about $45,000.
Finding A Mortgage Lender in DeLand
Greene Realty & Property Management can recommend a mortgage lender who can perform specific calculations for you, based on your own financial circumstances. This illustration is for example purposes only, and so that we can carry that $45,000 number forward for more calculations.
Determine Your Time Frame
Step two, is to determine your timeframe. If you plan on purchasing a home in five years, you will have to save $9,000 per year ($45,000 divided by five years). Of course, the shorter your timeframe, the higher your annual savings goal will be.
Since the money that you are saving for the down payment on a house has a definite purpose, you should save your money in super-safe vehicles like a boring old savings account or a certificate of deposit. This will allow you to get to this money easily when the time is right.
It is now time to clear some room in your budget to make sure that your savings goal is doable. That means you may have to earn additional income, cut back on expenses, or both.
By making room in your budget, this can help you save the kind of money you’ll need for your down payment, and it will also prepare you for managing the type of tighter budget that homeownership requires. Embrace it for all it’s worth!
Plan Your Savings Strategy
Most of us aren’t really savers, by nature, so, you’ll need to automate the savings process. You may try some sort of payroll savings plan. Just like your 401(k) plan, try allocating a certain percentage or dollar amount of your regular pay directly into a savings account or money market account dedicated to accumulating the funds for your down payment.
It not only makes the process automatic, but it also makes it invisible. Money moves from your paycheck to your dedicated savings account without you even seeing it happen. It will remove both the temptation and ability to spend the money on other things.
You can shorten the process and reach your goals sooner by using income-tax refunds, gifts received, bonuses or large commission checks, or even the sale of personal assets. Regularly depositing a few extra thousand dollars per year in “windfall” money, can chop a couple of years off your savings time.
It is important to build flexibility into your savings plan. There will always be unforeseeable demands on your budget like car repairs, medical expenses or even a loss of a job. You will have to be ready with an emergency fund before you even start saving for your down payment.
Buying a home can be a long process. It will require a good chunk of your savings but think of it all as preparation for homeownership. You’ll have all the expenses you currently have after you buy your home too, but you’ll also have large expenses related to the home itself. Think of saving for your down payment as a dry run to prepare both your finances and your psyche for the expenses that homeownership brings. The benefit of your OWN home surely out-weighs any negative.
If you are a tenant with Green Property Management, you will receive an added benefit for working with us as your buyer’s agent/realtor; a cash credit back to you towards the purchase of your home. This is less money you have to save, just for continuing to work with Greene Realty & Property Management. Call our office for details on 386-734-2200.