Preparing to buy your first home is an exhilarating, yet stressful experience. It’s one of the largest purchases you’ll ever make in life and saving 20% for a down payment is no easy feat. Even though some mortgage options ask for as little as 3% down, there are clear disadvantages to paying less money upfront.
If you don’t put 20% down, in most cases, lenders require mortgage insurance to limit their risk which will cost you a few hundred dollars extra in premium each month. In addition, putting less money down will increase your monthly mortgage payment and cost you more in interest throughout the life of your loan.
So, here are a few tips to save a large sum for your down payment even if saving isn’t your forte:
Break down your big goal and work towards less intimidating savings targets each month, quarter and year to gain momentum.
Say you’re shopping for a home that’s $200,000. The $40,000 lump sum may feel unattainable. But, if you start saving two years in advance, smaller monthly goal targets of $1,700 seems more doable, right?
Once you set savings goals, create a budget and action plan to hit your targets. Review your spending habits and look for areas where you can cut back to devote more money to savings.
Keep in mind, budgeting is like a diet. If you’re accustomed to overspending you can’t go cold turkey and expect to see long-term results. Instead make small, consistent changes to your spending habits over time to accommodate aggressive saving.
You should also look for ways to bring in more money to meet your savings goal. Can you pick up more hours at work? Can you devote bonuses, raises or other income to savings?
Controlling excess spending is a key way to increase savings, but you can find opportunities for savings on fixed expenses as well.
When was the last time you compared rates for your insurance, telephone service and other service providers? Shop for better rates to cut your monthly bills, negotiate for discounts and then put the money you save each month into your down payment fund.
Your down payment shouldn’t be stored in your everyday savings or checking account. Instead, open a high-interest bearing account, so your money can work for you while you stockpile.
Both brick-and-mortar and online banks offer money market and high-yield savings accounts with competitive interest. You can use sites like MagnifyMoney, Bankrate or MyBankTracker to check direct comparisons of interest and fees on accounts.
Close family and friends typically recognize saving for your first down payment is difficult, so they may offer to give you a gift or loan to cover it. Although it’s a generous offer, monetary gifts or loans for a down payment come with strings attached.
If lenders notice that a large part of your savings comes from a loan, it calls into question your ability to handle a mortgage and it may disqualify you altogether. Receiving a large monetary gift for a lump sum also has tax implications for the person who gives you the money. Make sure you both understand all that’s involved before accepting cash for your down payment.