With home prices rising, it may seem like it’ll take ages to save up for a down payment on a home. They say that anything worth having is worth waiting for, especially when buying your first house. Rushing the process can trip up first-time homebuyers and leave them with more debt than they’d planned for.
However, there are still several financially responsible ways to expedite the savings process and buy your dream home faster. With careful budgeting and a little research, new homebuyers can save up for a down payment in less time than they thought.
Calculate A Goal Before You Start Saving
Before you start saving, you need to know where you’re going. So as you begin browsing online listings, use a mortgage calculator to estimate how much the future down payments will cost. Doing so will help you learn how much you need to save and how long it will take. It also speeds up your home search by eliminating properties out of your price range.
The down payment is based on the price of a home. The higher the cost of the house, the higher your minimum down payment will be. For example, if a home costs $300,000, a traditional 20% down payment would be $60,000.
Discover Low Down Payment Mortgages
Not everyone has $60,000 (like the example above) lying around for a down payment. Fortunately, several types of mortgages allow buyers to pay less than 20%.
As a matter of fact, there are even some types that don’t require a down payment at all!
Four types of low down payment mortgages include:
- FHA loans
- Conventional loans
- VA loans
- USDA loans
The FHA loan, for example, allows people to buy a home with as little as 3.5% down.
The benefits get even better for active duty military or veterans: These individuals can get a mortgage with $0 down! One of the very few drawbacks of a VA loan is called a “funding fee.” This is a small percentage of the loan amount added to the mortgage. But, the silver lining is that it’s not paid upfront but throughout the life of the loan. USDA loans are also available for no down payment if the home is in a pre-approved rural area.
Except for VA and USDA loans, most mortgages received with a less than 20% down payment require private mortgage insurance (PMI). PMI adds additional costs to the mortgage payment each month. It’s meant to protect lenders if the borrower cannot pay their mortgage. Before taking out a loan that requires PMI, buyers should pay attention to real estate trends in their area.
Don’t let PMI deter you from taking advantage of an FHA loan. Other homebuying benefits, like a temporary mortgage buydown, can reduce your monthly payments and offset increased premiums.
Save Efficiently: Separate & Automate
Saving is easy if done efficiently. And it can be done efficiently if it’s separated and automated.
Picture this: Someone gets paid and takes care of their expenses. They’ve created a budget, and part of this budget is to set aside money each month.
The saver can have this money automatically moved to a separate saving account regularly. This accomplished two things.
On the one hand, the separate down payment savings account will be considered money not to be touched. And on the other hand, automation will “automatically” keep the saver accountable because the money will always be transferred into the down payment savings account. If it’s automated, the saver doesn’t have to worry about forgetting to save money each month. The automatic savings strategy keeps buyers on track to buy a home as quickly as possible.
Snowball Your Savings
Money that sits in a savings account will stay there, but it doesn’t collect interest very fast. So you can speed up your savings by moving money to an interest-bearing account.
For example, investing is an excellent way to snowball their money. And depending on their risk tolerance, there are a variety of options.
Some of the most popular options include:
Mutual funds are a collection of stocks, bonds, or other securities. These individual accounts allow anyone to benefit from stocks and investing without being as hands-on. When you put money into a mutual fund, it’s grouped with funds from numerous other investors. The total amount is overseen by experienced professionals who use the funds to buy and sell stocks or bonds. As an investor, you assume some risk, but it’s generally lower than independently investing.
Money Market Accounts
Money market accounts can be purchased through a bank account and will grow with added interest over time. Although the annual yields may seem low (around 3% at the highest), they’re safer than stocks and grow faster than savings alone.
Finally, treasury bonds can be purchased directly from the U.S. Treasury. Series I bonds are a popular choice because they move with inflation. For example, Series I bonds yield a more significant investment return if inflation increases. However, bonds are less “liquid” than other savings options; once you buy one, you won’t be able to cash it without penalties for one to five years.
Speed Up Your Down Payment Savings Today!
The fastest way to save for a down payment is by combining all these strategies simultaneously. There’s no reason to buy a home before you’re ready. However, people who are ready may want to save quickly to take advantage of lower housing prices and lock in the best interest rates. So what are you waiting for? The sooner you implement these tips, the sooner you can move into your brand-new house!