What is the best way to save for a house?

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Buying a house calls for a sizable, upfront investment, one that is typically dependent on personal savings collected over many years. If you plan to buy a house in the next couple of years, and have ample income and assets, you’re already halfway there. That down payment that you’ve heard so much about? It’s within reach.
If not, don’t worry — we’ll go over some time-tested strategies to help you save money, specifically how to save money for a house.

This is a good time to clear something up: While most people getting ready to buy a house think they need to secure 20% of the sale price as part of a down payment, that’s actually not true in most circumstances. In fact, if you qualify for certain first-time homebuyer programs, you may find down payment options for as little as 3%. Getting a VA or USDA loan? You may be eligible for zero down payment options.

Now, we’re also not saying don’t put 20% down. Conventional wisdom has a lot going for it, including the fact that a 20% down payment will save you from having to procure private mortgage insurance (PMI). The cost of PMI can set you back anywhere from 0.5%–5% of the cost of the original mortgage loan per year until you reach 20% total down payment, at which point PMI is no longer necessary.

So, what’s your goal? Whether it’s $50,000, $10,000, or $100,000, just get it down in writing. Being able to look at it makes the goal of saving money less formidable and more realistic.

Secondly, divide your savings goal by the number of years in which you want to accomplish it. Each year should represent how much you need to bank on an annual basis to buy a house. Think into the future — when do you want to become a homeowner? More importantly, when do you think you’ll have the necessary funds to be one? Is it two years…is it five years? A five-year savings plan for a $50,000 goal would mean saving $10k a year. Can you do that?

Now take this approach one step further. Divide your year savings goal by 12 (as in 12 months in a year). Doing this further divides the uphill march toward your savings goal and casts it in more approachable terms. If your goal is to save $50,000 to use for down payment and other housing-related costs (origination fees, closing costs, etc.), then it might be more manageable to see it in terms of a monthly goal.

It can be hard to save for a house when your recurring debt is high, and your income barely covers existing expenses. While it’s true that recurring expenses will be closely examined by your lender at the time of your mortgage application, at this juncture your primary focus is not loan approval — but what you can do to maximize savings.

Can you find a way to pay off your credit card debt or make a lump sum payment to drastically reduce your auto loan or student loan? These are the kind of debts that can follow you for years and prevent you from achieving a clear pathway to home savings. Hence, the lump sum. It can quickly and decisively help you reduce your debt, enabling future cash flow to go toward a home savings account.

Ask yourself: Are there any expenses that can be weeded out or somehow reduced? Is there nonessential spending that can be tamped down or eliminated altogether? What about online impulse buying and those ever-expanding streaming services? Surely, some (if not all) can be sacrificed in the pursuit of home savings.

We certainly don’t recommend this over the long term, but for a couple of years it might very well benefit you to stop directing cash into your retirement accounts and instead put it into your home savings account.

Some employees set 401(k) triggers at 5-10% of their paychecks — that’s a lot of money that can be redirected to help you with your homebuying journey. IRA accounts max out at $6,000 ($7,000 if you’re older than 50), so it’s pretty clear how that amount could be redirected toward your home savings account. Of course, once you achieve your home savings goal — even if you still have yet to finalize your home purchase — feel free to return to your retirement savings to build for the future.

Okay, you’ve doubtlessly heard a lot about side hustles and gig workers these days. While the terms might be relatively new, the concept is not any different than what people have been doing for generations to make ends meet: Get a part-time job.

In the era of the “share economy” a number of things come to mind, but perhaps none more notable than driving for rideshare companies. While they certainly have their critics, it’s the kind of hustle that might be manageable around your day job and could quickly add significant funds into the coffers to help you get aligned on your home savings goals.

You may also want to consider opening up a high-interest online savings account. While this sounds a tad conventional, there are some online banks that offer surprisingly high rates. Same goes for money market funds. If you already have a chunk saved, it could be a sound idea to stow some of it in one of these types of savings institutions and have it appreciate while you look for other ways to add to your home savings account.

Saving for an expensive purchase such as a new home is never easy, but it doesn’t necessarily have to be hard. When you think you’re ready, or if you just have questions, contact us to get a head start on the mortgage process. As always, we’re here to help!

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