How to Save for Your Down Payment
If all of this sheltering-in-place has you eager to upgrade your apartment into a condo or starter home, you’re not alone. Even better, mortgage rates are incredibly low, and it looks like the housing market is starting to reduce in cost. All of this means it’s time to start saving up on a down payment for your house. That being said, getting enough money to qualify as a down payment takes time, patience, and, in some cases, a bit of luck. Here are a few different ways to think about saving for your down payment.
How much of a down payment should you save?
If you were to take a course called Mortgage 101, you’d likely learn that the best amount to save for a down payment on a home is 20 percent of the total cost of the property. This means that if the home you’re interested in buying is $200,000, the median price of a home in America, you’d need to save up $40,000 plus a little extra for closing costs and other fees. While this general wisdom is correct since it means that you’ll avoid paying for private mortgage insurance, or PMI, there are some situations when saving up less of a down payment and paying PMI could still save you money. This is usually only a scenario if you live and work in a high cost-of-living city like Chicago or Seattle, so make sure to look at the New York Time‘s calculator first to see whether or not it makes more sense to rent or own a home at a certain price point. If your mortgage, taxes, and PMI are all less than your monthly cost to rent, it could make sense to buy with a lower down payment.
Cut your expenses
Once you’ve determined how much you need to save, it’s time to figure out where that money will come from. Cutting expenses in your budget is one way to free up some money to toss towards your down payment fund each month. Of course, you still need to pay for necessities like rent, food, and utilities, but if you can sacrifice a few dinners out or order water instead of soda, you’ll lessen the amount you spend each month. It’s also wise to look at any of the recurring subscriptions that you might not need. If you use Netflix and Amazon Prime far more often than Hulu, HBO, or Disney Plus, ditch the ones you don’t watch!
Increase your income
Of course, there’s only so much you can cut your budget. After you’ve made a few sacrifices, it’s time to look into increasing the amount of money in your paycheck. Maybe that means that you or your spouse pick up a side gig or take on another part-time job. While it takes time and energy out of your relationship, you’ll only need to do this until you have your money saved. Alternatively, looking for a new job entirely could net you a raise of $20,000 or more if you negotiate well.
Look at outside sources of income
In some situations, it may also be worth looking into alternative ways of getting money for your down payment. Sometimes, a family member may be willing to loan you money at a lower interest rate, or completely interest-free. In other situations, an ill family member may qualify for a viatical settlement on their life insurance policy, and may want to give you a portion of the settlement to jumpstart your home purchase. While a viatical settlement company generally gives money to help with end-of-life expenses, if some of that lump sum is leftover or means that you get more inheritance, that could give you the boost you need to make a down payment on your new home.