It's tough to know exactly how much money you should put down for a house. It’s typically recommended to put down 20% of a house's purchase price as a down payment. Putting down 20% will generally let you avoid the need to purchase mortgage insurance, and will allow you to receive better interest rates. Unfortunately, not everyone has the means to offer a large down payment. Even so, chances are you could be saving more money that you thought possible. Even if you’re not quite ready to take the leap into home ownership, it doesn’t hurt to start saving now. A large down payment could wind up saving you tons of money in the long run. Here are a few tips on how to save money for a down payment on a house.
Set a savings goal
You’ll want to have an idea of how much you need to save. Having a goal in mind will help keep you on track to reach your desired savings amount. Take a look at house prices in the areas you wish to move to, and make an educated guess as to how much you’d like to put down based on those prices. Be sure to set a reasonable time frame for yourself to achieve your savings goal. Remember, there are some loan products that allow up to 96.5% financing, or even 100% financing but these aren't necessarily the smartest option for everybody. Loans with low down payments often have higher interest rates and could cost you more money in the long run.
One of the best ways to break bad spending habits is to set up an automated savings plan. Similar to a 401(k) plan, this will automatically allocate a certain percentage of your weekly paycheck into a savings account dedicated to your down payment savings. This will help reduce temptation and ability to spend money rather than save it.
Cut unneeded expenses
Chances are you’re paying for luxuries that you don’t need to be paying for. Eating out less often can save a tremendous amount of money over the course of a year. Perhaps it is wise to skip the vacation this year and put that money directly toward your down payment instead. Canceling your cable plan is another way to save lots of money over the course of a year. Take a look at all of your expenses and see where you are able to comfortable cut back to help save.
Temporarily redirect your retirement savings
If you’re currently utilizing a retirement savings plan, you could temporarily stop putting money toward retirement and put it toward your down payment instead. It is not recommended you withdraw money from your retirement savings, only pause retirement deposits.
Just because you have made the decision to start saving for a house does not mean emergency expenses will not pop up. Car repairs, medical costs, or even job loss can happen at any time, and it’s important to be aware that these complications may arise. Therefore, it is important to have an emergency fund set up so you have money to handle these unforeseen complications without having to touch your down payment savings money.