How to save for a down payment on a house
by Shawn Carvin, Senior Mortgage Banker
While it’s possible to get a mortgage without a down payment, you can only benefit from having a reasonable amount to put down on your home purchase. The higher your down payment, the lower your monthly payments will be. Plus, if your down payment is less than 20%, you’ll likely have to pay Private Mortgage Insurance (PMI) until you have sufficient equity in your home, which will further raise your monthly payments.
With entry-level homes here in the Los Angeles area hovering around the $500,000 mark, even a 5% down payment – $25,000 – is a significant accomplishment for most people, not to mention putting together a full 20% down payment.
Unless you already have substantial savings or can get assistance or a gift from a friend or family member, you may have to put off buying a home for a couple years to raise a down payment. Even if you’re not sure exactly when you want to make the leap to homeownership, starting to save for a down payment now is a smart idea. Here’s are some tips to get you started.
How much down payment do you need anyway?
Figure out approximately how much of a monthly mortgage payment you can afford, and from there you can determine the upper end of your purchase price range. You’ll have to factor in taxes, insurance, possible PMI, and potential homeowners’ association fees, so it can be rather complicated. A mortgage banker – like me — can help you figure this stuff out. But once you have a house price range in mind, you’ll have a good idea of how much you need to save for a down payment.
Create a budget and follow it to save for your down payment
Set your monthly savings goal and determine how long it will reasonably take you to save for a down payment. If it seems like it’s going to take an unreasonably long time to get there, you’ll need to look at how you’re spending and/or ways to earn additional income in order to save more each month. You may have to limit how many times a week you get a latté or go out to eat, start bringing your lunch to work, cut out some luxury spending, or consider getting a part-time job. But these sacrifices can have a huge impact over the long term.
Accelerate your down payment savings by cutting recurring monthly expenses
You may be able to negotiate a lower interest rate on your credit cards just by asking. This can also help you pay off your cards more quickly, putting you in a better position to qualify for a mortgage. Check with your service providers to look at ways to save on your monthly phone, cable/satellite, Internet, and other bills. You can also look at how you use your utilities and reassess your power and water use. Do you need an apartment as big as you have? You can find a smaller one or consider getting a roommate. You could also trade in a vehicle to lower or eliminate your car payments.
Put your down payment savings to work for you right away
You should start an account for your down payment fund separate from your emergency savings—which you should absolutely maintain. It’s helpful to use a higher yield account for this purpose, such as a CD. And while it may be tempting to invest the money in stocks or mutual funds for faster growth, most financial advisors would agree that the risks of short-term investing are too high; you could potentially lose some or all of your money and have to start over. It might also seem like a good idea to take advantage of programs that let you withdraw or borrow from a retirement account, but make sure you talk with an advisor first. Most of the time, that money will better serve you where it is.
Slow and steady finishes the race
There are a variety of ways to save for a down payment on a house, and you don’t have to live a Spartan lifestyle to do it. The most important thing is to have a plan. Then just take the first step; soon, saving will become a habit. Carry it with you to your new home because it’s a good habit that will make you more financially secure throughout your life.