When considering buying a home, the down payment you make up front plays a major role in your future housing expenses. According to the Consumer Financial Protection Bureau, the down payment amount can greatly influence your mortgage interest rate, your monthly mortgage payment and your need for mortgage insurance.
Typically, lenders require anywhere between five percent and 20 percent of a home’s purchase price as a down payment. But the more you can put down, the better off you’ll be. By managing your spending and investing your savings – in a savings account or Certificate of Deposit, for example – you will be on the right track toward saving for your home purchase.
As you prepare for the home-buying process, here are six tips for trimming expenses that prospective homebuyers should consider in order to save a substantial amount for your down payment:
Develop a Budget & Timeline
Start by determining how much you’ll need for a down payment. Create a budget and calculate how much you can realistically save each month. That will help you gauge when you’ll be ready to transition from renter to homeowner. Use our Mortgage Calculators to determine how much of a mortgage you might qualify for, to compare mortgages, and more.
Establish a Separate Savings Account
Set up a separate savings or money market account exclusively for your down payment, and make your monthly contributions automatic. By keeping this money separate, you’ll be less likely to tap into it when you’re tight on cash.
Shop Around to Reduce Major Monthly Expenses
It’s a good idea to check rates for your car insurance, renter’s insurance, health insurance, cable, Internet or cell phone plan. There may be deals or promotions available that let you save hundreds of dollars by adjusting your contracts.
Monitor Your Spending
With Online Banking, keeping an eye on your spending is easier than ever. Track where most of your discretionary income is going. Identify areas where you could cut back (e.g. nice meals out, vacations, etc.) and instead put that money into savings.
Look into State and Local Home-buying Programs
Many states, counties and local governments operate programs for first-time homebuyers. Some programs offer housing discounts, while others provide down payment loans or grants.
Celebrate Savings Milestones
Saving enough for a down payment can be daunting. To avoid getting discouraged, break it up into smaller goals and reward yourself when you reach each one. If you need to save $30,000 total, consider treating yourself to a nice meal for every $5,000 saved. This will help you stay motivated throughout the process.
For more information and tips, visit the opens in a new windowAmerican Bankers Association (ABA).
This content first appeared on the American Bankers Association website, and is used with permission.