Tips for Saving for a Down Payment on a Home
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When my wife and I were saving for our new home, there were a lot of things we didn’t know. Thankfully, the internet is a great resource. Thanks to websites like Reddit and our local government’s housing department webpage, we were able to get more educated as first-time homebuyers.
While homeownership isn’t for everyone, with the market starting to cool off from the height of the pandemic, you may be considering what it might be like to own real estate instead of renting. I know that for us, the monthly payment on our mortgage loan wound up being several hundred dollars less than what our landlord wanted to raise our rent to the year we bought. This means that not only are we building equity as homeowners, but we’re also saving money by paying less than we’d have to as renters to live in a high-cost-of-living city.
From personal experience, I can assure you that the home-buying process is complex, exhausting, and, at times, confusing. Thankfully, you’ll have a real estate agent and mortgage broker to help you navigate many of the financial ins and outs of buying a home. Even so, before you can really start shopping around, you’ll need to save up a down payment.
Looking for tips to calculate—and reach—your down payment goal? Keep reading for strategies to help you save for a down payment on a home.
In this article
What is a down payment?
When you’re applying for a home loan, a few factors impact how much you need to ask for from your lender. Buying a home involves paying for the home itself and various closing costs to the title company, real estate agents, and any other services. To qualify for a conventional loan, you’ll need to be able to put some money down toward the house's purchase price.
Down payments for mortgages are typically a percentage of the home's overall purchase price. Most lenders require at least 5% down for you to qualify for a mortgage with them; however, some down payment requirements are lower if you’re taking advantage of one of the various home buyer programs available.
The typical rule of thumb is to put 20% down towards the purchase price of your home. This is because doing so means you won’t need to pay private mortgage insurance, or PMI, which is required if your down payment is less than 20%. If your home increases in value or your equity increases to the point that you have the equivalent of 20% of the original value of your home, you no longer have to pay PMI.
Take a look at your finances
Almost everyone dreams of one day owning a big, beautiful home. Maybe your dreams aren’t that big, but you want a large backyard or space in a finished basement for a home gym. As you make a game plan for saving for your home, you need to be realistic about what you can actually afford and how far your money will go. It all starts with taking an honest look at your finance.
Audit your income and savings
Your income is one component that factors into the amount lenders will be willing to give you when applying for a mortgage. As such, it’s a great indicator of how much you may want to save for your down payment.
For example, you might use an online mortgage calculator to determine that with a combined household income of $65,000, you could qualify for roughly $234,000 with an interest rate of about 6.9%. From there, you can determine if you want to spend more or less than that mortgage amount and create your down payment savings goal accordingly.
It’s also important to ensure that your saving rate is already in a good place before you start saving for a down payment. While home ownership can be a financially wise move when it comes to building equity, you should ensure that you’ve got an emergency fund and are contributing to other savings goals like retirement, too. Especially once you are a homeowner, your emergency fund will be quite important, so you don’t want to skimp on these types of saving just to accelerate the savings account of your down payment fund.
Set a goal for your down payment
Once you know what sort of mortgage you could qualify for, you can start thinking about your savings goals for a down payment. Using the previous example and assuming you wanted to have at least 20% down towards your home, you’d need to save $46,800 to purchase a home worth $234k.
Of course, if you know that in your market the only homes that will fit your needs are $300k, you have some math to do. Since the maximum mortgage amount you can expect to receive is about $234,000, you’ll need to save at least $66,000 to make up for the difference. Remember that this doesn’t include closing costs or the cost to move.
Use a budget to stay on track
Once you’ve set a goal, it’s time to get budgeting and figure out how you can make it happen! There are plenty of budgeting approaches and apps that allow you to set monthly savings goals and even adjust them to a certain timeline to see how much you need to save to reach your goal.
Using a budget will also help you visualize where your money is going, making it easier to stick to your savings goals. It can be tempting not to order Indian food after a hard day; however, if you know from your budget that that extra meal would take away from your down payment goals, it gets easier to make the decision that gets you one step closer to your new home.
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Make a plan for saving
Saving tens of thousands of dollars doesn’t happen overnight. If you’re trying to save $60,000 as a down payment and can save $500 a month, it will take you ten years to save up. Making a plan is critical for achieving your goal.
Create realistic goals
It should go without saying, but it’s important to be realistic about your housing and saving goals. Ten years is a long time to save for a down payment, and many people would like to have their down payment sooner than that. However, if $500 is all you can realistically set aside towards purchasing a new home today, you need to be realistic about your goal and timeline.
Consider down payment assistance programs
One thing to look into as you determine your savings target is down payment assistance programs. These are often for first-time homebuyers and can provide a range of down payment assistance, including things like:
- FHA Loans, which only require a down payment of 3.5%
- Department of Veterans Affairs (VA) Loans, which don’t require a down payment at all and are more lenient when it comes to credit checks
- United States Department of Agriculture (USDA) Loans, which are available only in rural parts of the country, and don’t require a down payment
All these programs can move your goalpost significantly closer — assuming you qualify. For example, if you can save $500 a month and qualify for an FHA Loan, you’d only need to save a little over $8,000 in order to qualify for a mortgage for a home worth $235,000. That means your savings goal could be reached in just sixteen months.
Compare savings accounts
When saving for a down payment, it’s a good idea to open a savings account specifically for that goal. Not only does that help you know exactly where you are in terms of your saving, but it also allows you to take advantage of a different kind of interest-bearing account. You may want to look into a high-yield savings account or a money market account.
High-yield savings account
A high-yield savings account is your best bet if you’re trying to earn interest on your money while you save. They are likely to be more competitive regarding interest rates than a money market account, and if you save tens of thousands of dollars, every extra dollar earned each year can help. One thing to note is that a high-yield savings account is less liquid than a money market account.
Money market account
If you’re just starting your down payment savings, it may be easier to open a money market account, since their minimums are typically lower than a high-yield savings account. As mentioned, money market accounts generally have less competitive interest rates than high-yield savings accounts. However, they are more liquid, so you could potentially draw from them if another expense more pressing than your downpayment comes up.
Automate your savings
Once you’ve created your savings account for your down payment, do yourself a favor and automate your savings. By scheduling automatic transfers from your checking account on the same day you get paid, you are far more likely to stay consistent in meeting your savings goal.
Related: The Best and Worst Housing Markets
Reduce expenses
If you’re trying to find extra money to throw at your down payment fund, reducing expenses and diverting that cash to your down payment savings account can be a great tactic. Not everyone can afford to reduce all of their expenses, but with some creative thinking and short-term sacrifices, you can easily free up at least $100 to send towards your goal of homeownership.
Find areas to cut back
Using your budget or banking statements as a guide, take a hard look at where you can cut back on your spending. Eating out and trips to the coffee shop are generally the easiest targets to rein in anybody’s budget. That may not mean totally sacrificing your weekly date night or Friday pick-me-up, but it does mean weighing the pros and cons.
If you eat out twice a week, and each bill is about $40, you’re spending $320 a month, or $3,840 a year, on dining. Cutting that down to one meal out a week nets you almost $2,000 towards your down payment — and you still get to eat out four times a month!
A word of wisdom: be really honest with yourself about the streaming platforms you do (and don’t) use. Do you only use one seasonally? Do you need to be paying for Hulu and AppleTV and Amazon Prime and Netflix and HBOMax and Discovery Plus and Paramount Plus and CrunchyRoll? For some people, it may make more sense just to buy a traditional cable subscription!
Explore downsizing
Downsizing may sound a bit drastic, especially if your ultimate goal is to move to your own home and not a smaller apartment than you already rent. Plus, not everyone can move back in with their parents, find a roommate, or move to a lower-cost-of-living area.
However, if you’re someone who can take advantage of this type of short-term sacrifice, it can reap major benefits. Even if you live with your parents for three years and pay them something in exchange for the roof over your head, you’ll likely accelerate your savings by thousands of dollars.
Get thrifty
Just because you save a few bucks here or there doesn’t mean you’re being cheap. Maybe you don’t need the name-brand Cheerios from the grocery store or can start buying in bulk from Costco or Sam’s Club.
Using apps like Target Circle, Rakuten, Honey, or even good old-fashioned coupons can also help you save money to use on your quest for homeownership. While these dollars don’t seem like much on the surface, over a few months, they can definitely add up.
Increase income
Another way to increase your savings is to find ways to increase your income. Here are a few options to consider.
Negotiate a raise
This may seem scary after the pandemic, but many people have successfully negotiated raises after taking on higher workloads due to staff turnover and shifting priorities during the COVID-19 lockdown. Negotiating a raise takes practice and confidence, but it can be a really easy way to increase your earnings quickly.
Many businesses boasted record earnings during the last few years of the pandemic, so if you were with your current company through thick and thin, do yourself a favor and ask for your slice of that pie!
Start a side hustle
If asking for a raise doesn’t work out in your favor, you can always pick up a side hustle to make some extra cash. Whether you’re looking for easy-to-do remote work or seeking out a legitimate part-time job, there are all sorts of platforms for you to start a successful side hustle. Best of all, you can set your hours based on how quickly you want to achieve your savings goals.
Explore passive income opportunities
How great would it be to be earning money to put towards your purchase of a new home without having to do almost anything at all? Passive income opportunities aren’t something that everyone will be able to take advantage of. However, if you’ve invested wisely in the stock market, own a rental property, or are interested in peer-to-peer lending or affiliate marketing, you may be able to supercharge your savings without even lifting a finger.
Find ways to build discipline — and stay disciplined
Like paying down credit card debt, saving for a down payment doesn’t happen overnight. It can involve a lot of highs and lows as you play the long game. Here are a few tips and tricks to build and maintain discipline throughout the process.
Use your budget
Just because you have a budget and look at it occasionally doesn’t mean you’re really paying attention. A budget is only as good as the person using it, so do yourself a favor and honor the money plan you spelled out for yourself at the beginning of the month!
Of course, there will always be times where you need to roll with the punches and move some money around to cover an unexpected expense. However, that needs to be done in consultation with your budget. Otherwise, you’ll find yourself three months down the road wondering how you convinced yourself that it made sense to eat out as much as you did.
Track your progress
A great way to keep your progress front-of-mind is with a visual tracker. If you Google “down payment coloring page” you’ll find all manner of images that you can fill in with crayons or markers as you work towards your down payment.
For example, my wife and I picked an illustration of a house reminiscent of the film Up, and colored in a balloon every time we had successfully saved another $500 towards our down payment. Keeping it on the refrigerator constantly reminded us of what we were pursuing together and kept us focused.
Find inexpensive ways to celebrate milestones
Sometimes, you’ve got to celebrate certain milestones, even if that means spending a little money. When you get to 25%, 50%, and 75% of your down payment saving goal, do something to commemorate it!
Some things that feel meaningful but aren’t going to break the bank and set you back on your saving include:
- Heading to the grocery store and buying a cake from the bakery
- Ordering pizza and having a movie night in
- Finding a deal on a local hotel online and having a one-night staycation
- Buying a $20 bottle of champagne
By building in rewards when you reach certain thresholds, you can gamify the saving process while still feeling like a human being.
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The bottom line
While it’s possible to pull from your IRA or 401k to help pay for a down payment, unless you’re in dire need of your own property, saving up over time makes much more sense.
Of course, saving money takes discipline, willpower, a clear financial plan, and time. Even so, there are ways that you can smartly save towards a down payment while still feeling like a functional human being who gets to see friends and enjoy hobbies.
With a budget, tenacity, and a realistic mindset, you can save up the money necessary to have a down payment and buy your own home. Speaking from experience, every open house we attended leading up to having our full down payment saved was a helpful reminder of what we were working towards. Put in the work and the effort, and homeownership will be well within reach!
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Writer
Brent Ervin-Eickhoff is a Chicago-based writer, stage director, and filmmaker with a background in digital marketing and content creation. In addition to Joy Wallet, Brent has written for Complex, Volkswagen, HowlRound, Picture this Post, and Third Coast Review, among others. He currently serves as the Associate Director of Marketing for Content Creation at Court Theatre at the University of Chicago. Brent graduated from Ball State University with Academic Honors in Writing.
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