A Guide to Saving for a Home in Today's Market

A Guide to Saving for a Home in Today's Market

The huge price tags on today's homes are keeping a lot of would-be homeowners from achieving their goals. It can seem totally hopeless to buy a home, but we're here to tell you that you CAN do it! Read further for more insight:

Is it Better to Pay off Debt or Have a Bigger Down Payment?

A common question from would-be homeowners concerned whether they should focus on saving for their down payment on a home, or focusing on lowering their debt. While it is possible to do BOTH, it could be advantageous to prioritize one over the other, but this depends on the situation and the type of debt you have. 

For example, if the majority of your debt comes from lower-interest debts such as student loans and car loans, it may be more advantageous to keep those accounts in good standing, but focus on saving your hard-earned dollars for the down payment for a home. However, if you find that you have high-interest debt such as credit cards, and lesser personal loans, you'll likely want to focus on paying those down as much as possible. 

Prioritize paying off debt when:

  • You have a significant amount of consumer debt
  • You are paying high interest rates on your debt
  • You are struggling financially because of your debt
  • You have a low credit score or high DTI (debt-to-income) ratio

Prioritize saving for your down payment when:

  • Are concerned about trends in the housing market and want to lock in a lower interest rate before they rise again
  • Have room in your budget to take on mortgage payments
  • Already have an emergency fund established
  • Have a good credit score and a low DTI ratio
  • Want to put down 20% or more to avoid private mortgage insurance

For more information on prioritizing debt or savings, read this article.

How Much Should you Save Up For a House?

When saving for a house, you'll want to consider a few big expenses that you'll need to pay out of pocket when closing on a home. Not only do you need a down payment, but you'll want to have some money set aside for closing costs, as well as an emergency fund to cushion any surprise expenses during the process. 

Closing costs range from home to home, but expect them to be about 3-6% of the amount of your loan. Most homeowners can attest to the fact that owning a home can get very expensive. An unexpected repair or even a change of income can bankrupt any homeowner without an emergency fund. Most experts recommend having an emergency fund of about 1-3% of your home's value.

As if that wasn't enough to think about, you'll absolutely need to save for your down payment. While the general rule of thumb is a down payment of 20%, it is possible to secure a home loan with a down payment of as little as 3.5%. 

Do I need to have a 20% down payment?

Not necessarily, but having a 20% down payment for your home can help with a few things: 

  • A more streamlined loan approval process-You increase your chances of mortgage approval with a bigger down payment, as lenders will likely view you as a good saver, and therefore a lower credit risk.
  • Lower mortgage rates-Since a higher down payment reduces your loan-to-value ratio, or the loan amount compared with the home's value, you can usually get lower interest rates from lenders. 
  • You'll likely pay off your mortgage fast and have a lower monthly payment-The more cash you can put down, the lower your loan amount. That makes it more likely you can pay off your entire mortgage sooner, saving you interest and letting you build equity more quickly. A larger home down payment cuts your monthly mortgage bill, leaving you with extra cash for other financial considerations, like college or retirement savings.
  • No mortgage insurance-When you put less than 20% down, your lender will likely require you to pay PMI, which it may charge as an upfront fee or as part of your monthly payment. This protects the lender if you can't pay your mortgage. Private mortgage insurance can be pricey—up to 1% of the entire loan amount on an annual basis, in many cases.

Tricks to Help You Save For a House

These options may sound obvious, but when saving for a purchase as large as a home, every little habit counts. 

  1. Build a better budget. You'll never be able to save your money for a down payment if you have no idea what you're spending most on. Once you've got a clear understanding of your expenses, you'll be able to evaluate where to spend less, and therefore save more.
  2. Consider downsizing. Living below your means temporarily can boost your savings significantly. If you're renting a luxury apartment and going to a nice dinner weekly, consider moving to a less-costly apartment and going to a nice dinner monthly instead. We're not advocating that you remove things from your life that make life worth living but spending mindfully can make a huge impact. 
  3. Reduce or completely cut out a bad habit. As much as we love our impulse buys and ordering takeout, they won't help you achieve your home-buying goals. 
  4. Ask for a raise or consider other employment options. If you've kept your nose to the grindstone for the past few years at your job, don't be shy about asking for a raise. Always advocate for yourself, and if all else fails, consider getting a part-time job or a side gig so that you can divert funds directly to your savings. 
  5. Skip the vacation, or rather re-invent your vacation. Everyone needs a fun break, but consider a shorter, or more local trip to cut down on spending. 
  6. Chop down your debt, you'll be so glad you did once you're sitting in your new home. 

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