Deciding on whether or not to buy a home is a big decision. In fact, given the length of an average mortgage, it’s more than likely one of the biggest decisions you’ll make in your life. With that, it’s important to be prepared when you do decide to purchase your first home and that starts with saving for a down payment. Ideally, you’ll want to have between 15% to 20% of the purchase price of your home saved as a down payment. Do the math – that’s a large sum of money, but if you start saving now, you can accomplish this. Here are some tips to help you along the way.
Determine how much you need to save
Deciding on a price range for your home is important, since it will allow you to determine how much you need to save before applying for a mortgage and how much mortgage you can qualify for. A good way to determine this is to look at your monthly income. Generally speaking, your mortgage payment should not exceed 27% of your stable monthly income. Don’t sweat over the numbers. Use this rule as a way to give you an estimate on how much your mortgage will be and then calculate 20% of this amount to determine how much you need to save. When you’re ready to know exact numbers, a mortgage expert can help you plan your next steps.
Calculate how much time you need to save
Let’s say that you want to buy a house for $145,000. That means you should have at least a down payment of $29,000 saved going into applying for a mortgage. Take this number and divide it by the amount of months you have until you apply for a mortgage. This will let you know how much you need to save each month in order to reach your goal.
Automate your savings
Saving money isn’t easy. In fact, it’s a habit that can take years to form. To help you save for your down payment, automate your savings. If you made a commitment to save $200 a month, choose a schedule where the money can be moved from your checking to your savings, without any work from you. This will take the work out of saving—let your financial institution move the money for you while you work in achieving your savings goals.
Save your bonus pay
Tax refunds, year-end incentive pay and lottery winnings can bring large increases to your cash flow. When you get a large sum of cash, try to save it all. Okay, okay… that may not be the easiest thing to do if you have debt or other problems that need to be fixed, but try and save as much as you can. The more you save, the sooner you’ll reach your savings goals.
When it comes to saving for a home purchase, it’s not about how you save; it’s about saving—period. Getting into the habit of saving money and staying committed to your savings goals is no easy feat, but necessary when trying to buy the home of your dreams.