Saving for a mortgage down payment is one of the most crucial and challenging steps you would make when you set your sights on a home purchase. This is because buying a house remains as one of the biggest goals of American families. A lot of factors come into play and the initial equity on the house is a big part of the whole process.
Once you set your sights on the house that you want, you need to save up for the down payment. Ideally, you need about 20% of the total amount so you do not have to pay Private Mortgage Insurance or PMI. This should be part of your home buying checklist. Having to pay PMI only adds to your monthly payment for the benefit of your lender. That insurance is to ensure that if you are unable to continue with the loan payments, they can recoup their investment.
As you save up for your mortgage equity, here are a few things that can definitely help you in your journey.
Your mortgage down payment will depend on the loan you will take out
One of the things you need to do first is to pin down the amount you will take out on your mortgage loan. According to Housing WIre, the average mortgage loan application is at $313,300. Truth be told, that is easier said than done. Even before you can walk up to a bank and apply for a loan, there are a lot of spadework involved in the process. There are a few things you need to do first before you apply for a loan.
For one, you have to sit down and figure out your budget. This is a crucial step because the more that you get a clear picture of your finances, the better you will be able to gauge your mortgage loan. You have to know how much you can afford for a house. Take in all sources of your income and match it with your expenses.
You need to understand as well that your expenses would go well beyond your down payment and monthly mortgage loan. Try to factor in taxes and insurance in your budget as well. These will definitely bring your monthly expenses up. If at all possible, look into putting in the cost of repair and upkeep as well.
Lay down your savings plan
Now that you have an idea what your finances are and how much the average house you want to buy, you can compute for the mortgage down payment. Dreaming about having a house is a good start but you need to work on those dreams to make them a reality. When it comes to buying a house, you need to start with your down payment.
Your savings plan would give you an idea how long and how much you need to save up to get to your goal. Take for example a $300,000 house where you plan to save up for a 20% equity. That would amount to about $60,000. If you give yourselves 5 years to save up for it, that would mean $12,000 a year. This boils down to saving about an extra $1,000 a month for the mortgage down payment. Having this goal could help you budget better and find ways to save up and prepare for your home purchase.
Fast track your savings
With the sample computation above, that could really put a big dent in your finances. It is not easy to look for an extra $1,000 a month to put away for a mortgage down payment. This can result in drastic lifestyle changes as you aim to save for your home purchase. It can make you cut down on expenses and live on the bare minimum.
Though cutting down on expense will help, you would have an easier time if you combine it with an increased income. As you cut down on costs around the house, you can look for ways to increase your net income every month. You can put in a few more hours at work or even look for a side hustle you can manage on weekends.
Another strategy to help you reach your desired mortgage down payment amount is to invest that money while you are still saving up. Rather than put it in a savings account, you can explore other financial tools that could yield higher returns. While you balance the risk involved, this will not only help you compound your money and grow it, it can also shorten your timeframe. You could hit your goal sooner.
How to keep your down payment intact
Once you are able to successfully get your rhythm in saving your down payment, life happens. There will be instances when you are faced with financial problems and tempted to dip into your savings. Here are a few things you can do to help you keep your savings intact.
As mentioned earlier, investing the money can help you increase and fast track your savings. On top of this, investing the amount helps you protect that fund as well. This is because most investment tools are not that easy to liquidate. You would have to wait for a few days to get your hands on your investment.
If this does not deter you from dipping into your investments, the possibility of losing money is also possible. There are some investment tools that are better left untouched for a few years to help you grow your money. Taking it out prematurely might make you miss out on earnings and defeat the purpose of investing the money in the first place. Just be sure to understand some investing myths that can make you think twice about putting your money in investments.
Save for emergencies
One of the best ways to contain financial emergencies is to proactively prepare for them with your emergency fund. There is no way to know what tomorrow will bring and when emergencies will knock on your door. Your car could be running smoothly one day and hit a pothole the next. This can leave you with a flat tire and alignment issues. In fact, the Federal Reserve recently shared that 44% of people would have a problem covering a $400 emergency expense.
You might feel like your safe with your day job but end up being shown the door unexpectedly. When these things happen, you might be tempted to dip into your mortgage down payment just to get out of the situation. That is why you need to consistently build up your reserve funds to help you address unexpected financial situations.
Commit to your budget
Once you have your budget, the next step is to make sure you follow it. This seems like a practical next step but you would be surprised how many people struggle with this. It is one thing to create a budget and another to follow the same. Making sure you follow your budget needs a lot of drive and will power.
Save and forget
One strategy you can look into is to save and forget. It could get a little getting used to but if you can pull it off, it would be a great strategy. Similar to how you approach your bills where after payment, you forget about the money you paid out. Think of your mortgage equity in the same light. Once you put the money in that account, you try to forget about it.
Out of sight, out of mind. The less you think about it, the lower the chances that you would dip into it. Your temptation to use it would not be as much as when you keep thinking about the money you are saving.
Saving for a mortgage down payment is a challenging goal but a rewarding one as well. When the time comes that you step inside your own house, all your effort will be worth it.