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Saving up for a down payment is one of the most important steps towards home ownership. Use these common sense actions to easily save up for a down payment on a home.
Saving money for a down payment is one of the most important steps in the home buying process. However, this can also be one of the most difficult parts of buying a home for many people. This is due to a number of factors, such as the home buyer having to pay rent and having to pay down debts in order to improve their credit score to qualify for a better mortgage.
By taking these common sense actions, you can come up with the money that you need to make a sizeable down payment.
Before you even start saving up for down payment to purchase a home, you should begin by determining how much of a home you can actually afford. This process is fairly easy, as described in our previous blog post titled " How Much House Can I Afford?"
You will begin by calculating the total of all your monthly expenses. The lenders are primarily concerned with the monthly revolving debts that will show up on your credit report and not your common household expenses. You will also need to calculate the total of your gross monthly income, before any taxes or other deductions are made.
Using the information from your income and expenses with the house affordability calculator, you will get a good idea of what price range for a home you should be considering when saving up for a down payment.
The most important step of saving for a down payment is to get started. Whether it is a piggy bank or a separate savings account, it is important to start saving money as soon as possible. Setting aside a little money to get started can give you the motivation you need to get serious about saving for a down payment and buying a home. Making a commitment to put a small amount of money into your down payment fund on a regular basis can help you get off to a successful start.
Although it's important to start saving, it's also important to have a goal in mind. By having a goal, you can determine how much needs to be saved periodically (per month, per paycheck, etc.) in order to reach your goal. A necessary down payment amount can be anywhere from 3% - 10% of the purchase price, depending on the type of loan. However, it is ideal to be able to save up for a 20% down payment.
For example, if you were to purchase a home listed for $350,000, then you would need to save up $70,000 in order to have a 20% down payment.
With a 20% down payment you will not need to pay for Private Mortgage Insurance (PMI) which is a type of insurance that protects the lender from financial loss when borrower defaults on the loan payments. By not having to pay PMI, you will have a lower payment amount and will be able pay off your loan more quickly.
Another benefit of the 20% down payment is that interest rates tend to be lower when compared to loans with less than 20% down payment.
Many people are surprised when they see how much money they spend on various items. If you are serious about wanting to save up for a down payment on a home, it is important to carefully track every penny that you spend over a period of a month.
Once you complete tracking these expenses, you should sit down and calculate a total for the amounts you spent on these various items. By tracking your expenses carefully, you will be able to use this information to find areas where you can cut unnecessary expenses and turn them into savings.
Nearly all businesses around the world must make budgets and adhere to those budgets on a continual basis in order to ensure they will be successful in the future. It is no different or less important when it comes to your personal finances.
Living on a budget is crucial to meeting your financial goals, such as saving for a down payment. By using what you have learned through tracking your expenses, you can set a strict budget that will allow you to avoid overspending on unnecessary items and saving more money for a down payment.
The budget should be a specific plan that dictates how much money will be spent on your necessities, such as rent and utilities as well as what should be spent on discretionary items such as entertainment and dining out.
While it is important to start small in order to start building success, you will need to save some serious cash into your savings account to actually achieve your savings goal. With information from your budget, you should determine how you much can reasonably save, then commit to this amount on a regular basis while you continue to take action to reduce spending and boost income whenever possible.
By simply getting started, taking the process seriously, working toward a realistic goal and staying motivated, you will find that the money for a down payment will be available sooner than expected.
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