For most of us, buying a house is the biggest investment we’ll make in our lifetime. Since many cannot afford its price, most will resort to a mortgage, which means you also need to save for a down payment.
It’s also well known that, the bigger your down payment, the better your credit conditions will be, so it makes sense to save as much as you can, so that you’ll lose less money down the road.
Having at least 20% of the money you need to pay for your new home will void some costly insurance fees, will allow you to secure a way better home loan with a lower interest rate. Not to mention that, by having lower monthly payments, means you have more money each month for your family’s expenses or to pay off your debt faster.
Let’s see what are the steps you need to take in order to save for a bigger down payment on your future house:
Figure out how much you can afford to spend on your new home
Start looking for houses/apartments to buy. See their prices, neighborhoods, taxes etc.
Get your numbers straight about how much you can actually afford to pay for such a house. Since most of us cannot spend millions of a home, it makes sense to figure out exactly the maximum price you can afford.
Say you’ll settle for a $250,000 home.
This means that you need to save about $50K to have a 20% down payment.
Sure, this is ideal, many lenders allow you to get a mortgage with a way smaller down payment, but we’ve already concluded that at least 20% will give you some really great conditions compared to a way smaller down payment.
Now you have a GOAL: You’ll need to save up $50,000.
Start a budget
Can’t get away without one.
Start tracking your expenses for 1-2 months to get an idea about your overall costs.
Then devise a SIMPLE budget, outlining your main spending categories and try to stick to it.
Pay off any high interest debt
Hmm, so we’re talking about saving for a down payment and you are asking us to pay off debt now?
Any high interest debt will prevent you from saving fast, not to mention that it’s almost impossible to set your finances straight, when you carry so much weight.
So, paying off some of most costly existing debt makes sense.
Find a debt payment strategy that best suits your needs and go for it.
READ MORE: How to Stop Being Broke – The Ultimate Guide
READ MORE: Debt Consolidation Pros and Cons
Start a savings account
It’s true that saving money is not as lucrative as it used to be tens of years before. Hence the reason why many people would rather invest the money than just let it ‘sit’ in a bank account and do ‘nothing’.
Still, in this case, it’s wise to start a dedicated savings account.
As you can guess, that’s not your future emergency fund and you shouldn’t ‘dip’ your fingers it in either to pay for some travel extravaganza or fancy presents this Christmas.
Automate your savings account
Speaking as someone who’s routinely forgotten to pay some of her bills, I’d say AUTOMATE as much as you can. Set a monthly rate you are comfortable with and have your bank account transfer the money on ‘auto-pilot’.
This is very easy to do, your bank will transfer a certain dollar amount from your checking account to your savings account. You can set your desired date as well. Quick tip: don’t forget to leave this money in your account each month, otherwise you might get some pretty nasty overdraft fees (depending on your bank conditions).
Aggressively save money
Phew, now that you’ve done all your planning, it’s time to really make it happen.
By now you should have a budget (and stick to it), a clear savings goal, plus a savings account that automatically gets ‘fed’ with money every month.
Do your best to save as much as you can: direct any windfall to your savings account, use at least some of our 100 ways to save money on electricity or our extensive list of ways to save money. There are many food related saving opportunities as well.
Don’t go to the extreme though, you do need to have a nice fulfilling life as well.
Check your credit score and improve it
Your credit score is VERY important, so it makes sense to try repair bad credit (if you have a low credit score) and improve it as much as possible.
Together with a big down payment saved, a great credit score will allow you to access some of the best mortgage deals: lower interest rates, smaller monthly payments, better conditions overall.
If you followed these steps you have now a big enough down payment and are ready to own real estate.