Rachel from Chicago has a question about saving up for her home down payment.
My husband and I are trying to save for a down payment on a house. We are pretty good at living within our means.
Any advice on how to make this easier, smarter, more fun?!
Saving up for a home down payment can feel like it takes forever, especially if you live in a high cost of living city like Chicago.
Your patience will pay off though. With a bigger down payment, you’ll be able to have a much lower monthly mortgage payment.
Here are 10 steps to help you save up for your next home down payment.
1. Create a Savings Goal
It’s hard to save up for a home down payment if you don’t know how much you’re supposed to save!
Let’s say you’re shopping in the $300,000 range for a new home. Go for a down payment of 20% or more. This will help you avoid Private Mortgage Insurance (PMI) – an additional lender fee that can be upwards of 1% of your loan.
If you dip below a 20% down payment, not only will your monthly mortgage payment be higher, but the PMI will steal more of your money each month. So if you only put 10% down on this $300,000 home, you could owe an additional $225 per month (or $2,700 annually).
If you go with 20% down, you avoid the PMI and that simple math gets us to a $60,000 down payment. Now let’s get saving!
2. Develop a Budget
If you’re not already managing your cash flow each month, consider developing a budget so you can plan ahead. With this new goal of saving for a home down payment, your advanced thinking is going to make the process a lot easier.
Your budget should include your monthly take-home pay and all of your typical monthly expenses. If it’s your first time budgeting, it may take you a few months to get it right. Over time, it’ll feel like an easy old habit.
To make the process easier, consider using a budgeting app like Mint. We’ve used it for almost a decade and it helped us to save up for our last home down payment.
Zeta is also a great budgeting tool for couples to consider.
3. Decide How Much You Can Save
Once you review your full budget, you’ll be able to see how much you can actually save each month toward your down payment.
Let’s say you find that you have $1,000 extra each month that can go toward your $60,000 down payment. That means you’ll hit your goal in 5 years.
Now if you feel like 5 years is too long to wait, no worries! Let’s see what we can do to speed it up.
4. Reduce Your Joyless Spending
While it would be quick to give up things like your daily coffee or eating out for lunch with friends, let’s first take a look at reducing the spending that doesn’t make us happy first.
Homeowners & Auto Insurance
If you have a car, you definitely need auto insurance. The same goes for a home. But you don’t need to overspend on them.
Consider bundling home and auto insurance together and negotiating with your current provider. If they don’t give you a good deal or a reduced price, shop around to other insurance partners who will.
Negotiate Your Cable Bill
Is your cable bill going up and up each year?
It’s time to negotiate a better rate or switch to another provider. With all of the entertainment options out there, it may make sense to cut the cord on cable altogether.
Switch to an MVNO Cell Phone Plan
More cell phone providers are offering you an option to pre-pay your bill. By doing this, they are offering much lower rates. I recently did this with Verizon and saved about $30 per month for our family.
After tackling some of these joyless spending areas, see what else you can do to reduce spending in the big three areas of housing, transportation and food. Maybe a switch to Aldi could save you a few hundred per month?
5. Automate Your Savings
Once you’ve found a reasonable monthly savings goal, make it automatic. Partner up with a good online bank that offers a high yield savings account. I like Ally as I’ve been a customer of theirs for a few years now. Here’s a list of some of the top online banks out there right now – some of them are even giving cash bonuses for new customers!
After you have your partner determined, set up a recurring deposit each month from your checking account to your new online savings account. This way, you’re setting it and forgetting it. With the higher interest you’ll be receiving from your online savings account, you’ll get there even faster.
Before you know it, you’ll have that $60,000 ready for you!
6. Use “New Money” to Fund Your Account
If you want to speed up the process even faster, take the “new money” that comes into your life over your savings period and save it all as well. Here are some examples:
- Tax returns
- Selling stuff on Facebook Marketplace
- Commission checks
Some of this new-found money is rare, but if you’ve made a conscious plan beforehand to allocate it toward your goal it won’t float away when it arrives.
7. Transfer Spending to Cash Back Credit Cards
Spending with credit cards instead of cash comes with risk, but as you said, Rachel, you’re pretty good at living within your means. I’d suggest signing up for a cashback credit card like Capital One’s Quicksilver. It’s my favorite card.
If you sign up and hit their $500 minimum spending requirement within 3 months, you’ll receive $150 cashback. Additionally, you’ll get 1.5% cashback on all purchases.
Nicole and I get a check from them each month based on our typical spending. I love getting random checks in the mail!
If you’re not already living on a budget and don’t have control of your spending, then I wouldn’t recommend getting a credit card. But if you are in control of your spending and you’re going to be spending the money anyway, you might as well be rewarded. Nicole and I used this theory over and over again and got a $6,000 family trip to Cabo San Lucas for $300!
8. Use Visual Motivation to Help You Hit Your Goal
If your home down payment savings goal lasts for years, your motivation might start to fade. That’s why it’s important to keep that goal front and center in your life.
Print out a picture of your dream home and attach it to the fridge. That way, you’re reminding yourself of your goal on a daily basis. When you’re tempted to move away from your plan, that picture will keep you focused!
You can also use a chart or goal thermometer and have fun with it. Each week or month, you can color in another level on your chart until you’ve reached your goal.
9. Make Sure you Factor in ALL other Costs of Homeownership
Your home mortgage is only one piece of the homeownership puzzle. Don’t forget about these important recurring monthly costs as well:
- Utilities (electric, gas, water, etc)
- Home maintenance and repairs
- Lawn care
Also, you’ll want to save up enough for these one-time expenses as well:
- Closing costs
- Updates to the house when you move in
- Furnishing the new home
When we forget about these important costs, that’s when the credit card debt can start to take over. It's super easy to throw that stuff on a credit card, but you’ll be paying majorly high interest for it and it might take a while before it’s all paid off.
10. Get a 15-Year Mortgage
Owning a home is awesome. It’s your place to relax, raise your family and make some memories.
Homeownership is even better when you aren’t paying a mortgage anymore. So make a plan to be mortgage-free in the future and get a 15-year mortgage instead of a 30-year mortgage.
You’ll pay off your loan faster and you’ll even get a lower monthly interest rate. LendingTree is the partner we used to get our last home mortgage. They compare lenders on your behalf and save you time and money.
Rachel, I hope these 10 steps help you to get your down payment and eventually the house of your dreams!