How to save for a down payment on a home: part II
Last month we explained how to save for your down payment. Now that you’ve done that, it’s time to focus your plan.You already know that purchasing a home is a substantial investment, and you’ll need to ensure you can afford the monthly mortgage payments. You’ll also need to save up enough money for a down payment and other associated expenses, such as closing costs.
While you don’t always need to supply a larger down payment due to programs and resources now available for qualified borrowers, the higher your down payment is, the better it is for future finances. Your monthly mortgage payment will be lower and you may qualify for better rates or terms.
A larger down payment allows you to retain full ownership of the home faster and can save you a substantial sum of money through lower interest rates affixed to mortgages.
Determine a goal
You should take a look at your finances to determine what kind of home is affordable. A financial expert or mortgage loan consultant can help figure out the best budget for your current financial situation. In addition, online calculators can estimate how much house you can afford. Also, a mortgage loan consultant can look at pre-approving you for a home loan to help determine which loan type you prefer or are qualified for, if mortgage insurance will be required and give you an idea of how much the closing costs and total monthly payment will be.
You can also reach out to real estate agents in the area to ask about the average listing and selling prices of homes in different neighborhoods you’re considering. If you know you want to move to a specific area and homes typically sell for $300,000, you can use that information to tailor a down payment goal specifically to that amount. So, a 20 percent down payment, which is on the high end of the recommended 5 to 20 percent down payment, would equal $60,000.
Do a credit check up
During the pre-approval process, you will be able to have your credit score reviewed to see if there is room for improvement. Be sure to go off of this new credit score since many consumer scores you see on websites are not the same as what a lender uses.
Find ways to save
We also recommend automatically putting a portion of your paycheck into your savings account. You’ll miss the money less if you don’t get a chance to see it in your checking account in the first place!
Another way to boost a savings account is to work more hours/shifts (for hourly employees) or take on another job. Temporarily increasing total income will help you reach your goal and supply a proper down payment for a dream home.
You can cut down on a number of extra expenses in order to start building up savings, just like you would with any savings goal. Eating dinner out, heading to the movies every weekend and purchasing coffee every morning can really add up.
When saving money for a down payment, you should make a list of all expenses that are required, such as rent, food, clothing and monthly bills. All other extra expenses should be listed in order from most to least costly. By cutting out the most frivolous expenses and trimming the fat from there, you can develop a budget that saves a substantial amount of money.
In addition, replacing certain costs with less expensive ones can help significantly. Here are some ideas for cutting your current living costs:
- Cancel cable and invest in a more affordable streaming service
- Create your own vending machine stash of snacks at your desk instead of visiting the machine once a day, save $1/day or $20/month
- Brew your own coffee, save $4/day or $120/month
- Cut back on one restaurant visit per week, save $25/week or $100/month
- Drink glasses of ice water instead of new bottles of water (an environmental choice, too!), save up to $1/day or $30/month
- Carpool once a week, save $6/week or $24/month
- Skip one impulse buy, save $40/month
- Cancel your home landline phone service and just use your cell phone, save $50/month
We don’t expect you to adopt all of those suggestions while you’re saving for your down payment (actually, you probably have a few creative ideas of your own that didn’t make our list). However, if you did incorporate those short-term cuts into your life, you could save $400+ a month and $5,000+ a year!
How do you plan to save for your down payment?
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Jackie Ahumada is a mortgage loan officer with UMB Bank. She has more than 10 years experience in the mortgage industry and more than 18 years in management of customer service delivery and operations.