Ready to buy a home? Saving towards a down payment for a mortgage is the first major step towards purchasing a new home. Ideally, it’s best to have a down payment of 20+ percent of the purchase price, which is a lot when you consider the price of a home. How can you get started on saving tens of thousands of dollars for this purchase? Below is a 7-step “How To” to begin saving for your mortgage down payment.
Step 1: Figure out how much you’ll need to save!
Before you begin saving for a down payment for a house, you first have to know how much you’ll need to save. Twenty Percent of the purchase price is ideal, although there are other options. If your goal is 20%, you’re more likely to be approved for a mortgage, you’ll get a lower interest rate, have more equity in your home from the start, be exempt from paying PMI (Private Mortgage Insurance), and have a lower monthly mortgage payment. Plan to sit down with a mortgage lender who can help you figure out an ideal mortgage plan and review other loan options.
Many people believe your housing expense should not exceed 28% of your monthly income, although many lenders will approve approximately up to 40%. So if your income is $5,000 a month, you can safely allocate $1,400 of that ($5,000 x .28) to your future house payment.
With current mortgage rates at approximately 4.5 percent, this will translate into a mortgage loan amount of about $177,500. Calculate putting 20% down, and this is how you get the amount to save:
$177,500 divided by .80 = $221,875, minus the $177,500 mortgage loan = $44,375, or rounded up, $45,000. So, you’ll be purchasing a house for $222,000, with a $177,500 mortgage, and a down payment of about $45,000. There are grant programs and incentives for being a first time homebuyer (if you are considered one), through NC Housing, and some loan types can allow buyers to put 0-3.5% down. The above scenario is if you plan on putting 20% down. As a Dave Ramsey ELP, Erica Anderson is always an advocate for purchasing smart and not over extending yourself.
Step 2: Figure out your Time Frame
The next step is to determine your timeframe. If you plan on purchasing a home in five years, you’ll have to be prepared to save $9,000 per year ($45,000 divided by five years).
Step 3: Slash Expenses
Sit down and make a monthly expense chart. List out, in columns, every bill that you pay on a monthly basis so that you can see what you are spending your money on each month. Take those columns and separate them into Must Pay Bills, Cut Back Bills, or Don’t Need Bills. See below for an example:
|Must Pay Bills||Cut Back Bills||Don’t Need Bills|
|Electric Bill||TV/Internet Bill||Stop Eating Out|
|Gas Bill||Grocery Bill – Coupons/Make Meal Plans||Lottery Ticket Purchases|
|Water/Sewer Bill||Credit Cards – pay them off and/or don’t use them||House Cleaning/ Dry Cleaning|
|Car Payment, Gas, Insurance & Tags||Irrigation Systems (use less water)||Shopping Spree/ Birthday Gifts|
|Rent/Mortgage/HOA||Lower Cell Phone Bill||Cancel Memberships|
Step 4: Sell Items
When was the last time you purged your home? You could have a garage sale and make some extra money. Check all closets of each family member, collect coats, clothing, old shoes that either don’t fit any longer or you haven’t worn in a long time. Look to see what has been hiding in your attic, basement, cupboards or garage. Sort through holiday décor and tools you don’t use, furniture, appliances, and dishes/cups. Sell anything you no longer use – Get Rid of It!!
Step 5: Set Aside Unexpected Money
One of the best ways to save is to put away extra money that you didn’t have prior to when you started to save for a down payment. This could be money received in a one-time lump sum, like a bonus check or tax refund, or if you received a pay raise, set that extra money aside. This could result in a huge chunk of money to put away.
Step 6: Take on Extra Work
There are lots of ways to earn side cash by not having to get a second job, especially if you are already working long hours at your full-time career. Enjoy taking walks in the evening? Have some neighborhood dogs join you. Have to mow your lawn on the weekend? See if any homeowners in your neighborhood would like for you to mow their lawn as well. Tutoring and selling products from home are two great resources for extra earnings.
Step 7: Skip your Annual Vacation
Many families spend at least $2,000 on the average vacation, cut it out this year. There are great family fun activities to do for little to no cost right in our area. Review some camping trip options here: https://www.tripstodiscover.com/best-places-to-camp-in-north-carolina/, explore the beautiful NC waterfalls https://www.onlyinyourstate.com/north-carolina/nc-waterfalls-road-trip/, or visit this link to see some more stay-cation ideas in Wake County: https://www.visitraleigh.com/plan-a-trip/visitraleigh-insider-blog/post/30-free-things-to-do-in-raleigh-nc/.
After you’ve worked so hard to save up for a big down payment, the last thing you want to do is make a bad financial investment. That’s why it’s so important to work with an experienced real estate agent who has your best interest at heart. Call a Holly Springs Realtor at Team Anderson Realty at 919-610-5126; we are here to help.