How to Save for Your Down Payment
- Apr. 3, 2014
- Chelsea Beebe
- Personal Finance
One of the most crucial, and often times overlooked, parts of the home buying process that could make or break your ability to purchase your dream home is being able to come up with a healthy down payment on a house. A Federal Loan is a great option that doesn't require as high of a down payment like a conventional loan, however the less money you put down on the house up front, the more money you will be paying over the life of the loan. While it is completely understandable that not everyone has that extra 20% of the value of the home you want to purchase lying around, this is where saving really becomes a dire part of the process.
Budgeting yourself is not only a good practice to get in to when saving for your home, but to continue doing once you have that mortgage payment every month as well. Consider how much you believe your mortgage payment will be and add that to the list of your monthly expenses. Take a look as how much money you are spending a month on luxuries. How many times a week do you go out to eat at restaurants? How many non-essential items do you purchase each month? How often do you travel? How many subscriptions and memberships do you have that come directly out of your bank account that you don't even think about? It can be surprising when you consider how much money you are spending on things that you don't really need each month. Cutting out a few of these extras and putting the money you would have spent into a separate saving account will help you start to create the foundation for your down payment.
So let's put these budget tips into practice. The first step, figuring out where your money is being spent, will give you a real number and clear idea of exactly how much you are making verses how much you are spending. Go ahead a make a list of all your monthly expenses and determine how much each one is costing you. Include things like rent, gym memberships, groceries, eating-out, entertainment, car payments, ect. At the end of the list total up how much of your monthly income is going into savings and how much is being spent.
The second step, eliminating extraneous spending, allows you to choose which of your expenses are essential and which ones you can still live comfortably without while saving for your down payment. Go through the list you just made and rate the importance of each expense on the list. Obviously expenses like car insurance, groceries, rent and health insurance are essential and cannot be cut from the budget. Take a closer look at those luxury items though because for many people, these are the expenses that take up the bulk of their budget. What items on this list can you do without while you save for your dream home?
The third and final step, putting the money you are saving in a separate account, will allow you to see your savings grow and will make the sacrifice of cutting out your extra spending much more rewarding. After you've determined what expenses can be cut from your budget, it should be easier to go ahead and add these funds to your separate savings account that will help you start to create the foundation for your down payment.
Click here to read about the next step in the home buying process: pre-approval.