How to Save for a House: 6 Easy Tips for Budgeting
It takes more than just saving for a down payment to prepare for a home purchase. Closing costs and moving expenses are a couple of additional factors to consider. It is common for first-time buyers to worry if they’ll have enough set aside to make their dream of purchasing a home a reality.
According to a 2021 Zillow survey, 64% of first-time buyers put less than 20% down on a home, and one-quarter of those put down less than 5%. That would be the equivalent of $120,000 and $30,000 or less on a typical starter priced at $600,000.
To get you started, I have 6 tips that will help you with saving for your first home.
1. Open a high-interest savings account
While you're saving for a house, it makes sense to have your money working for you. A high-interest savings account can be a good option. Another option is to invest your money in the stock market, but this is often a riskier, longer-term strategy with no assurance that you will profit in the long or near term. Instead, creating a high-interest savings account can help you make some money without having to worry about stock market volatility eroding your assets.
2. Automate your saving process
Pay yourself first. Most people save toward the end of the month, but doing so increases the likelihood that you will spend it between payday and the month's conclusion. Try automating a transfer from your checking to your savings account instead; a good rule of thumb is to time the transfer to coincide with your pay cycle. If you are paid every Friday, set up an automated transfer from your checking account to your savings account on that day. You won't be enticed to spend money that way.
3. Cut back on your monthly spending
Increasing your monthly savings is the quickest approach to saving for a home. Reducing your monthly expenses is helpful because you can direct those savings toward your future housing costs. To start, look at your money coming in and going out on your bank and credit card statements. Examine your spending to identify areas where you might reduce or eliminate non-essential spending. For example, you can stop paying for subscriptions you don't use, switch to generic goods from name brands, or make a lunch at home instead of going out to dine.
Examining your critical spending to see how you may lessen those payments is another strategy to cut costs. For better auto insurance rates, for instance, you can compare quotes or bundle policies. You can also bargain for a lower internet bill, refinance personal loans, or, if you have numerous cars, reduce the number of cars you use.
4. Pay down your debt
The debt you owe can impact your ability to save because a portion of your income is designated to those debts each month. Pay off any high-interest credit cards since the longer you keep a balance on them, the more interest you'll wind up paying. If you have any loans with low balances, you might decide to pay them off fully to stop paying interest. For the time being, don't focus too much on your larger debts.
5. Generate Extra Income
Earning additional income will enable you to save for a home much more quickly. Having a side business is a good way to save money, but keep your main job. When determining your eligibility for a house loan, your lender will take into account all of your income sources.
Following are some ideas to consider:
Rent out a spare room or parking space
Take up a part-time or weekend job (e.g., driving for Uber/Lift)
Ask for a raise at work
Sell a big item like a car/furniture
6. Track your savings progress
To keep track of your progress, use a spreadsheet or an app like Mint. The mobile app for your bank account can provide a free feature that you can use. You'll be fully aware of both your current savings and the remaining amount you need to put aside. Saving money is less stressful when you can see your progress, which keeps you motivated.
Now that you know how to save for a house, utilize our mortgage calculator to determine your monthly mortgage payments.
How much money do you need to save for a house?
To figure out how much you need to save, determine how much you can comfortably spend on a home. It's normally recommended to set aside up to 25% of the home's purchase price in cash to cover your down payment and closing costs. This will include:
Down payment: expect to need about 3-20% of the purchase price saved to cover the cost of a down payment.
Closing costs: try to save about 2-5% of the purchase price to cover closing costs.
Moving expenses: The average cost of moving a household is about $1,250 or $4,890 if moving long distance.
To buy a $600,000 house, for instance, you would need to save between $18,000 and $120,000 for a down payment, between $12,000 and $30,000 for closing costs, and roughly $1,000 for moving charges like a vehicle and packing goods.
The amount you need to save to pay for upfront costs can vary based on the type of loan you are eligible for, the purchase price, the location, your down payment size, and a number of other factors. Don't worry though; a local lender can assist you in figuring out how much money you should save aside for a house and how to do it in a time frame that works for you.
How long does it take to save for a house?
The real estate market is always changing. Only you can determine whether you'll be financially able to purchase a home in a year, two years, or even later. The amount you can currently afford to save each month will help you estimate how long it will take to save for a home.
With an aggressive saving strategy, it is possible to quickly reach a down payment goal. For example, by saving four times the current median rate, you could save a 3.5% down payment ($21,000) in 2.5 years. This savings rate equates to roughly 10% of their median monthly income or about $700/month.
Starting early rather than later is ultimately the best strategy to begin saving for a home. The sooner you figure out how much you need to save and begin budgeting, the closer you will be to receiving the keys to your new home.
Buying a house can feel very overwhelming and a little scary, however it is also something that is within reach. For many of us, it's the biggest purchase we'll ever make, so it is important to create a plan and follow it. If you’re ready to take your first step toward homeownership, schedule a call with me today!