How to Save for Down Payment of Your Dream Home

Before you start your savings journey you will need to map out your goal. Your first step is to determine how much you need to save. You should consider the following when figuring out how much you will need: The size and type of property you want and the cost of that type of property in your area. You should also consider what percentage you will need for your down payment.

You may not actually need much down payment as lenders will accept far less with the purchase of mortgage insurance. You could also check if your state has a first-time homebuyers program which offers smaller down payments and lower rates to the young and hopeful homebuyers. Besides this, there are also many loans like the FHA Loans that will accept a down payment of 3.5%. But you will have to consider the pros and cons of using this type of loan.

However, financial advisors recommend that the ideal amount that you should save is 20% of the property value and another 3% for closing costs. According to Investopedia, by saving this much for your down payment you will avoid monthly payments for private mortgage insurance(PMI) which is about 0.3% to 1.2% of your loan amount. Besides this, you will also be approved for a mortgage, get a lower interest rate, and have more equity in your home from the start.

When you are saving money for down payment it is important to build flexibility into your savings plan. Before saving for your down payment you should make sure that you have an emergency fund as there will be other demands on your finances like major car repairs, temporary loss of job or uncovered medical bills. You will have to be ready when they happen as they will not magically stop just because you have a goal of saving money for your down payment.

Keep the emergency fund well-stocked as you will have to simultaneously prepare for predictable expenses such as replacing your car.

You should examine your budget and determine how much you can afford to save each month. Then you will have to make it happen preferably when you receive your paycheck or direct deposit.

You should not try to invest this amount in the stock market or loan it to a real estate investor to get a high rate of return as this is a recipe for disaster.

The most popular and convenient way to save money is to transfer the certain percentage of your regular pay you have decided on into a special online savings account. You could save this at the same bank or credit union where you already have an account.

You should also set up an automatic direct deposit into your savings account. This will not only make the process automatic but your money will move from your paycheck to your savings account without you even see it happening.

However, you must be committed never to use these savings for any purpose other than down payment.

You should review your expenses and flex your budgeting muscles to tighten your spending temporarily while you work on saving up cash for your dream home. You will be amazed as to how much money you can save by paying attention to your spending. You can save a significant amount by:

You can shorten the process of saving money for down payment or make it easier by banking on periodic windfalls.

These steps will not only fuel your momentum but also put your goal within sight without you feeling the burden of penny-pinching. It can also chop off a couple of years off your savings timeframe.

If you are saving for a down payment then this is good advice. It does not have to be forever. You can pick up an evening or weekend retail job around the holidays for some weeks and help to build up your savings.

You can also consider many ways to make money from home depending on your unique skills, assets or amenities you have at your disposal. Here are some ideas:

If you have already started saving for retirement and planning to buy a house (in the next two years or less), you can temporarily stop these savings and redirect those funds towards your down payment savings account.

A word of warning: you should not borrow from or cash out your retirement accounts, as you will not only get hit with taxes and early withdrawal penalties but it will also cripple the longtime growth of your retirement savings. This mistake can cost you hundreds of thousands of dollars at retirement.

However, you could look for penalty-free withdrawals for home buyers in your retirement plan. Many profit-sharing or company-sponsored 401(k) plans allow employees to borrow against savings so that they can purchase a home. Your Payroll or Human Resources department can help.

It may sound counterintuitive to pay down your debts when you are saving up for a down payment, but this is not so because high-interest debt can be a huge drain on your finances and limit your ability to save. Let us say that you have a high-interest credit card that is charging you 14% and you are saving money in a savings account which is getting you around 1% . This will be a brutal 13% spread. So you should try to pay down these debts as soon as possible and put your homeownership on hold until you pay off your high-interest debts.

You can start with your high-interest card first and when you have paid the entire balance you could close that card and proceed to pay off the next. You could also transfer your credit card balances to a card with the lowest interest rate.

Another thing you could do is to take advantage of 0% balance transfer offers so that you get a little extra breathing room. But you should not do this if you plan to buy a house in the next year or so as it would trigger a hard inquiry on your credit report and can bring down your score a few points.

Buying a home is a long process and requires a good chunk of your savings. Saving for down payment will be a practical test to prepare both your psyche and finances for extra expenses that homeownership will bring.