An important step in the home buying process is deciding on, and paying, your down payment amount for your home. A down payment is the portion of the home price that isn’t borrowed and is paid for up front [1]. For many potential homebuyers, this part of the process can seem very stressful and difficult to achieve. The reality however, is that buying a home may be more within reach than you think. So let’s talk about saving for the down payment of your future home.
How Much Should I Save?
Many people think there is a certain percentage of a home price you need to save in order to buy. “A recent Freddie Mac survey found that nearly a third of prospective homebuyers think they need a down payment of 20% or more to buy a home. This myth remains one of the largest perceived barriers to achieving homeownership” [2]. Not only is this untrue, but it’s also keeping many people from achieving their homeownership goals.
The amount you pay for your down payment is a decision made by you and your lender. Typically, it ranges anywhere from 3% – 20% depending on your home loan [1]. Although repeat home buyers typically will pay around 17% down payment, partly in thanks to money made selling a previous home, for first time home buyers it’s a different story. The average down payment amount for a first time homebuyer is only about 6%. [3] This is much lower than the 20% many new buyers think they will need.
How Do I Save Effectively?
Now that we know a new home buyer will only have to save around 6% of a home loan, how do they get there? First, it is important to understand that saving for any down payment, whether it’s 5% or 15%, can still be a challenge. “For first-time home buyers, 26% said saving for a down payment was the most difficult step in the process” [3]. In order to achieve this goal, a new home buyer will need to practice good spending and savings habits. So, with this in mind, let’s talk about some of the best ways to save up for your down payment.
A vital part of saving for a down payment is just that: saving. “One of the best ways to save for anything — including a down payment — is to set it and forget it. If you receive a regular paycheck, ask your employer to direct a portion of that payment into a savings account. If you’re a freelance worker or independent contractor, set up a recurring transfer from a checking account to a savings account to establish the routine” [4]. If you want to achieve your target down payment, especially on a certain timeline, you will need to develop good savings habits and resist the temptation to dip into those savings.
Another important piece of the puzzle is healthy spending habits. Research at NAR found most homebuyers reported having to make sacrifices in order to afford their down payment. These sacrifices included limiting spending on luxury goods, like clothes and entertainment [3]. This also means taking a good, hard look at your expenses and deciding where to cut back. “Do you really need a subscription to Netflix, Hulu, Disney+ and every other entertainment service? How often are you actually using your gym membership? Can you start making coffee at home instead of grabbing one at the café down the street each morning? While these are seemingly small expenses, every bit counts” [4]. Limiting spending to only the necessities will give you the power you need to achieve your dream of homeownership.
The Takeaway
Even though saving up for a down payment may seem intimidating, if you are willing to work for it, it is more achievable than you may realize. Not only are down payments for new home buyers typically much lower than the 20% many people expect, they are also much easier to save for by simply developing healthy habits with your money. With consistent saving and smart spending, you can reach your target down payment in no time.
Sources
[2]https://myhome.freddiemac.com/buying/down-payments-and-pmi
[4]https://www.bankrate.com/mortgages/how-to-save-for-a-down-payment/#save