Decided that you want to stop renting and begin saving for a down payment? Amazing!
Buying a house can be a truly exciting time. You start looking at houses on search platforms like Zillow and RedFin in the area you want to live. You attend open houses and contact real estate agents to see who might be a good fit to help you find your dream home. Or maybe your journey is looking at a home that you want to slowly fix overtime. The options are endless.
The not-so-fun piece of buying a home? Figuring out your plan on how much money you’ll need to save as there are plenty of expenses involved in buying a home. The first question that’s almost always asked is, “How do I start saving for a down payment?” You can use these four tips to help you begin your homeowner journey.
1. Determine how much you can afford and what amount of money you need to save for a down payment
There can be a lot of number crunching involved when saving for a down payment. The first thing you need to consider is how much you’ll need to save for a down payment. Typically speaking, housing costs shouldn’t exceed 28% of your gross income so it should be advised you keep that in mind when you start shopping for affordable homes. The more money you save to put down, the less interest and other fees you’ll need to make monthly payments on when you finally close.
Last, buying a house is more than just the down payment. You need to account for closing costs when purchasing a home. Closing costs may include inspection fees, appraisals, homeowners insurance (you need to pay the first year upfront!), real estate agent’s commission, and other fees that might be associated with your loan.
2. Put your down payment savings into a high-yield savings account or a certificate of deposit (CD)
Online cash accounts like Personal Capital Cash, savings accounts, or certificates of deposits (CDs) can offer flexible options for your money while also making your money work for you. Numerous regular savings accounts can pay you a lower APY on average, whereas high yield cash or savings accounts, or CDs can provide higher yield percentages on your savings.
One thing to keep in mind is that CDs usually have a fixed term rate, which means that your money is earning the same percentage each month for the duration of your contract. The rates are generally higher than savings accounts, but this also means that most of the time you cannot add or or subtract funds from your CD during the fixed term. If you break your CD contract, you may have to pay back interest earned.
Money being saved for a down payment should likely not be put in the stock market. The stock market is great for long-term investing because you may have time and the flexibility to ride out market volatility. If you invest your savings for a down payment, there’s always the chance of losing money due to an economic downturn like the one we are facing today.
3. Automate your savings every month
One of the most helpful tools I’ve found when trying to save money is automating a specified amount to be transferred from my checking account to my savings account every month. This means I won’t accidentally forget to do this on my own each month and think I have more discretionary spending.
Automating your savings is easy to-do. If you have an employer that allows for direct deposit into multiple accounts, make one of those accounts a high yield cash or savings account specifically for your down payment. This way, the money is out of sight and out of mind completely.
If your employer doesn’t have this option, setting up a monthly transfer can be pretty intuitive. Take a look at your monthly budget and figure out the best time to make a monthly transfer — I recommend when you get your paycheck.
4. Label your account “House Downpayment”
I make sure to label my savings accounts with what I am working towards whenever I have a big savings goal as it keeps me psychologically invested in what I am working towards. This strategy provides meaning and purpose for the reason why I am not putting my money towards other things like a new pair of shoes.
Use these strategies to help streamline your down payment savings process. So happy for you and your decision to take on this amazing goal!
*Personal Capital compensates Tori Dunlap (“Author”) for providing the content contained in this blog post. Additionally, in a separate referral arrangement between Author and Personal Capital Corporation (“PCC”), Author is paid $70 and $150 for each person who uses Author’s webpage (www.HerFirst100k.com) to register with Personal Capital and links at least $100,000 in investable assets to Personal Capital’s Free Financial Dashboard. As a result of these arrangements, Author may financially benefit from referring potential clients to Personal Capital and/or be incentivized to present blog content that is favorable to PCC. No fees or other amounts will be charged to investors by Author or Personal Capital as a result of the Referral Arrangement. Investors that are referred to PCC and subsequently subscribe for investment advisory services provided by PCC’s affiliated adviser, Personal Capital Advisors Corporation (“PCAC”) will not pay increased management fees or other similar compensation to Author, PCC or PCAC as a result of this arrangement. Additional information about PCAC is contained in Form ADV Part 2A available here.