With mortgage rates finally dropping below 7%, you may be wondering if now is the right time to enter the housing market and buy your first home. You’ve already tried Redfin’s mortgage payment calculator to see how much of a mortgage you can afford, but now you’re wondering how you can save up for a down payment as quickly as possible. Saving for a down payment takes a little planning, a lot of discipline, and sometimes takes more time than you think. Here’s how:
start with a plan
The first task is to create a plan. You need to know where you’re going so you can plan your course well. Assume you want to purchase a home with a sales price of $450,000. Depending on the type of loan you choose, your lender will require a down payment of at least 3% of the home’s sales price. In this example, 3% of $450,000 equals a $13,500 down payment.
Keep in mind that the more you put down on your loan, the lower your monthly payments will be and the less interest you’ll have to pay over the life of your loan. Lenders also typically add mortgage insurance (PMI) to conventional loans with a down payment of less than 20%. PMI increases your monthly mortgage payment, so if you aim for a 20% down payment, you won’t have to pay PMI in full.
If you decide to put a 20% down payment on a $450,000 home, you’ll need to come up with $90,000. It may take some time to accumulate that amount, especially if you’re just starting out.
You’ll also need to decide how aggressively you can save for a down payment. Let’s say you want to save $90,000 over two years. That means you’ll need to set aside about $3,750 each month to reach your goal. Where will that money come from? We can help. Learn how to save for a down payment in 7 easy steps to get started on the path to homeownership.
Impact of down payment on monthly mortgage costs
Your down payment has a big impact on your monthly mortgage payments as well as your need for private mortgage insurance (PMI). The following example shows how down payment amounts (20%, 10%, and 5%) affect the monthly payment on a $500,000 home at a 6% interest rate. A higher down payment reduces your principal and potentially eliminates PMI, reducing your monthly costs, whereas a lower down payment increases your monthly expenses by adding PMI costs and increasing your principal payments. .
1. Eliminate high-interest credit card debt
To eliminate high-interest credit card debt and save for a down payment, organize your credit cards from highest to lowest interest rate and try to pay them off in that order. Another idea is to consider moving your high-interest card to a zero percent interest offer. Banks often offer up to 12 months of no interest on these cards. This can be a great way to get debt-free, as long as there are no annual fees or balance transfer fees associated with the card, and you can pay off the debt within the promotional period.
Pro tip: Paying off high-interest debt can also help lower your mortgage rate when you’re ready to apply and begin the homebuying process.
2. Tighten spending
Now is the time to carefully consider your monthly budget. What are you currently paying for that you could do without (temporarily or permanently)? Here are some ideas to get started.
Create a budget: Track your income and expenses to see where your money is going. Set spending limits in areas like dining out, entertainment, shopping, and more. Reduce unnecessary subscriptions: Review all monthly subscriptions, such as streaming services or magazine distribution. Cancel what you can live without. Cook at home: Eating out frequently can be expensive. To save money, try cooking at home more often, preparing meals, or planning to go grocery shopping more often. Limit impulse purchases: Avoid unplanned purchases by making a list before you shop and sticking to it. Consider waiting 24 hours before purchasing anything other than essentials. Lower your energy costs: You can lower your energy bills with simple actions like turning off lights when not in use, using energy-efficient appliances, and lowering your thermostat. Shop smartly: Look for discounts, use coupons, and consider buying common brands of household products. Shopping sales can make a big difference in your monthly expenses. Check your insurance policy: Shop around for cheaper car, home, or health insurance rates. Adjusting your coverage or bundling your policies can lead to significant savings.
3. Increase your income
A great way to increase your savings is to increase your income with a side hustle or side hustle. When considering a side hustle, consider both options that complement your current occupation and those that more appeal to your passions.
For example, let’s say you work as a school teacher but love refinishing furniture. Refinishing furniture may be something you can do in the evenings or on weekends to earn extra money to reach your down payment goal.
Another side hustle idea is to teach or sell some of your unused possessions online. Are you creative? Maybe it’s time to sell your work and start your own business.
4. Hide away your “found money”
Found money is money received unexpectedly, such as a gift or a tax refund. Instead of spending it, put it into your down payment savings account right away.
It could also be an annual raise, an inheritance, or a bonus from work that you rarely receive. If you got a raise at work, continue living on your previous income and put that extra money directly into your savings account each payday.
Remember that high-interest credit card debt you paid off in step 1? Once the card is paid off in full, you continue to pay the same amount as if you still had a monthly payment, but instead you pay it into your down payment fund.
5. Track everything you spend
Be careful where you can expect to save money. Are you thinking of trading in your old car for a newer model? Consider whether you can defer the money and put it into a down payment savings account after you buy the home. .
Do you go on a luxury vacation once or twice a year? Or maybe you take a few small weekend trips each month. Instead, consider the idea of a staycation and keep the money you spend on gas, lodging, and food straight to your savings.
Make sure you have enough clothing allowance. Now may not be the time to buy wallets in both colors or worry about the latest fashion trends. Instead, set aside the money for the clothing as a down payment.
6. Borrow from relatives to save up for a down payment
If you’re lucky enough to have supportive relatives, consider asking them to help with the down payment. Many lenders allow borrowers to finance part of their down payment with financial gifts from family members. To do this, lenders typically require a gift letter from the family providing the funds. This letter should clearly state that the money is a gift, not a loan, meaning there are no plans to repay it. Be sure to discuss this option openly with your relatives and ensure that all documentation is in place to avoid complications during the loan process.
7. Set up a high-yield savings account
Maximize the interest you earn on your savings by opening a high-yield savings account. This allows you to grow your down payment funds faster because you earn more interest compared to a standard savings account. High-yield accounts typically offer interest rates several times higher than traditional accounts, making them a smart choice for growing your money over the long term. Additionally, most high-yield savings accounts are easy to open online and often have low or no minimum balance requirements, so you can start saving right away, regardless of your initial deposit amount.
