If the never-ending rising cost of rent worries you, you are not alone. Many renters are looking for clever ways to employ how to save money for a house, especially millennials who are going through financial stress.
In a situation where the cost of rent is increasing, you need to find ways to save money for a house- otherwise, the situation becomes hopeless.
In fact, don’t buy a house for the wrong reasons since all your friends are buying or just because it’s a buyer’s market.
Purchase because you’re financially prepared and you want to be a homeowner. Even though you might not be ready to buy a house right now. You should still start thinking about how to save money for a house.
Cost of Rent has Been Increasing Over Time
A recent study shows that from 2001-2018, the cost of rent increased by an average of 32%. On the other hand, the increase in household income over the same period is marginal. When rent increases, managing finances becomes difficult, and it becomes hugely harder to put more money aside.
According to Builder Online, it takes about seven years of consistent savings for millennials to gather the 10% down payment required to buy a home. Don’t lose heart; we have tips on how to save money for a house down payment fast.
It’s harder to save
The ever-rising cost of housing, healthcare, and college are all leaving you with little or no money on hand to save. Over the last two decades, wages have not risen much. Mostly, they’ve flattened out, which has not helped you save either.
The widespread availability, and use of credit cards, has facilitated impulse buying more than you earn and affected savings rate.
Connecting the stagnating incomes, higher costs of living expenses, the lure to overspend, and the decline in saving rates becomes inescapable. Because of the three vices, it’s really difficult to save up enough money for a down payment.
It all depends on how motivated you are to achieve your saving goal. If your “WHY” is strong – it’s possible to achieve it, and nothing can stop you.
How to Save Money for a House down payment
First, you need to ask yourself some vital questions before you start saving for your home.
Your response to these questions will help you plan your finances better.
What is the total cost of the home you want to buy?
Let us assume you want to buy a house for $200,000.000. You will need to come up with a plan on how you’re going to save for a downpayment. Budgeting plays a key role here.
How much is a down payment required?
For a conventional loan, you need at least a 5% down payment, but with FHA loans a 3.5 percent down payment requirement is the minimum.
In an ideal world, you should put down 20% as you don’t purchase mortgage insurance, adding between 0.5 to 1 percent to the total mortgage loan.
However, 20% is a big chunk of change to save up for especially for millennials unless you got rich parents who will give it to you.
When do you want to buy a house?
This depends on how fast you’re going to save for the down payment. The most common mortgage terms range between 15-30 year terms, and they can be variable or fixed-rate mortgage terms.
Its recommended to go for a 15-year amortization mortgage, but that also depends on your financial situation – can you afford the higher monthly mortgage payments.
Once you’re ready to buy a house, go to a bank and get a mortgage pre-approval or complete an online mortgage qualifier before you start looking for a house.
To properly save for a house, it’s important to maintain total control of your income. Monitor your expenses and free yourself from the burden of debts to have a healthy financial standing..
Having answered the questions above
It’s time to find ways to save for a home down payment. No matter the amount you need for the down payment, it is necessary to adjust your finances so you can save money fast. The strategies below will help you reach your goal faster.
After doing research here are 17 ways to save for down payment on a house fast
Copyright: Image by StockUnlimited
1. Open a special savings accounts for your home down payment.
First and foremost, open a savings account not linked to a credit or debit card. Disable email money transfers from this account and online banking. If it’s free, get monthly statements emailed to you to see progress.
2. Automate your Savings
Once you’ve determined how much you’re going to save monthly or biweekly. The next step is simply to determine a pre-authorized amount to transfer to your down payment savings account automatically.
Just provide the bank with the details for your account to set up the automatic transfer.
In fact, it is a hassle-free way to save money, and it compels you to manage your money efficiently. You won’t miss this amount within no time, and your expenditures will adjust to accommodate it.
Consistency is critical, and you will be surprised that such small savings grow over time, leading to the realization of your objective – a new homeowner.
3. Sell your vehicle.
One of the fastest ways of kick-starting your savings goal is to sell your car. If public transport is a viable alternative, go for it. You got to be brave and determined to achieve your saving goal.
Your friends will think you are crazy but keep an eye on the prize.
You will save more for a down payment from reduced monthly expenses on gas, insurance, and routine maintenance cost.
4. Cut down on lifestyle inflation
Buying a house is a great investment and a huge accomplishment. But achieving great things come with a measure of sacrifice. That is why you should cut down on an expensive lifestyle.
For instance, you can decide to buy less expensive brands of clothing, reduce visits to the bar, or go for a less expensive vacation.
When you adjust your lifestyle, you will avoid expensive pleasures that drain your cash. As a result, you can direct more funds towards down payment savings.
Related article: 5 Bad Money Habits That Are Destroying Your Financial Future
5. Get a Side Hustle
Copyright: Image by StockUnlimited
A side hustle is a job taken in addition to your full-time job. Are you good in math or science, and do you like kids?
Find a job to tutor on weekends or a couple of hours after your regular 9-5 gig. Instead of just watching TV or playing video games, you will be earning money.
Even just 20 hours per week on a side hustle can bring in extra cash that directly goes to the savings account opened for the house down payment. It will speed up the process for you to reach your saving goal faster.
- Are you a math or science wizard. Tutor math or science to students and bring in extra cash
- Do you like pets-Try out dog walking or pet sitting side hustle
- Are you an IT guru or SEO champion. There are plenty of bloggers looking for help with wordpress customization
You can use the income from your main job to pay for your living expenses; trust me, the long-term benefits are worth the trouble.
Related article: The Practical Guide to Purchasing Your First Investment Property
6. Sell stuff you don’t use.
Do you have valuable and lightly used things that are sitting idle in a garage or storage? If you haven’t used it in a year or more, then you no longer need it.
Sell them now and forward the proceeds to your home down payment savings account.
In addition to the cash you earn from sales, you are also decluttering your home. In the short run, it will reduce the work, stress, and cost of packing when you are finally moving to your new home.
7. Get a roommate to split the rent
One of the major expenses that drain income is rent. Find a roommate or two to split the rent, utilities, cable, internet, and other expenses. You will be making substantial savings by sharing an apartment with a friend to cut down on costs.
This approach can help you slash your rent expenses by half! There are plenty of people who are willing to share an apartment to cut down on expenses. So, it will be easy for you to find a roommate; at the end of the day, it’s a win-win situation for both of you.
8. Pay off high-interest debts first.
It is almost an impossible task to have savings when you are neck-deep in debt. The best approach in this scenario is to prioritize your high-interest debts and pay them off quickly.
Once you are free from the pressure of indebtedness, you will have a lesser financial commitment at the end of every month. This will free up cash for you to start saving towards your home down payment.
9. Create a monthly budget and follow it
Copyright: Image by StockUnlimited
How to save money for a house is best achieved by a budget. If you do not have a monthly budget, you should start creating one immediately.
A personal budget is a financial statement that allocates your monthly income towards savings, debt repayments, and savings. Taking control of your monthly expenditure is the best way to manage your household finances.
In truth, take advantage of various digital tools or apps to create a budget and track your expenses. Examples are CountAbout, Tiller, fudget, mint, Pocketsmith, and many others. These apps provide an easy way to create a budget and monitor your monthly spending without hassles.
Related 8 First time Home buyers tips
10. Move-in with your parents
Cutting down on your rent expenditure is one of the best avenues to make substantial savings. So, you can consider going back to live in your parent’s house to cut down on rent expenses.
Although living with parents has its shortcomings for an adult, you will be glad you did after achieving your downpayment saving goal in no time.
On the other hand, living with your parents will allow you to keep in touch with family members. You can even take cues from your parents and learn how to run as well as organize your home when you finally buy it.
Also, ask your parents how to save money for a house, they may have brilliant ideas that you can adopt to help you reach your saving goal faster.
11. Prioritise your needs
Refrain from making impulse buying – it happens when making unplanned purchases for products when you go shopping. Of course, you will have the urge to buy things.
But, ask yourself if you really need the things you want to buy. Setting the right priority will help you spend your money on the things that are most important to you.
It will be worthwhile to forgo little shiny objects to purchase your dream house. Make it a habit to think twice before buying anything and always follow the list as you only buy the things that you need.
This approach will help you reduce unnecessary expenses, thus increasing your savings toward your down payment. It also helps you develop financial discipline.
12. Get a loan from family and friends
Taking a conventional loan from a financial institution for the down payment is not advisable. But seeking a loan from family members and friends is a great way to get funds for a down payment.
Talk to your parents, siblings, grandparents, or friends to loan you money for your down payment.
This approach is excellent because family or friends will offer favourable repayment terms like lower interest for the loan than banks.
Besides, the loan will not have an impact on your credit score and will not lower your borrowing capacity. So, if you have a family member or a close friend that can help you with a loan, go for it.
13. Ask for a pay hike
Ask for a pay raise at work, especially if you have been a hard-working and loyal employee to the organization with an excellent annual performance review. Ask your manager or supervisor for a raise politely during your annual review meeting.
Tell your manager about your intention to buy a house and ask for support. Your employer might show goodwill and support you in monetary or nonmonetary ways.
14. Pull funds from 401k or 403(b)Retirement Account
If you are maxing out your 401k retirement contributions and your company is matching it. Some 401(k) and 403 (b) retirement plans allow owners to borrow funds from a retirement account to buy a new home tax-free.
If you are an IRA account holder, you can withdraw funds for a downpayment only if you’re a first-time homebuyer.
Another benefit of withdrawing from the 401(k) account is that your loan isn’t factored into your total debt ratios; therefore, it doesn’t reduce your total mortgage amount.
Of course, there are negative consequences if you fail to repay your retirement account withdrawal loan. They include
- You pay income taxes on the amount you borrowed as well as an early withdrawal penalty of up to 10 percent.
- If you quit your job while paying back your 401(k) loan, as per policy, you have 60 to 90 days from the termination date to pay it off completely.
- Your retirement funds miss out on the opportunity to grow while it’s tied up in the house.
Think through all these consequences before pursuing any option above.
15. Skip taking expensive vacations for a year or more
Copyright: Image by StockUnlimited
Direct the funds you could have spent vacationing and put it towards saving for a down payment. I know life is stressful, and sometimes you want to take off for an all-inclusive holiday in Mexico. However, if your WHY is strong it can be suppressed.
II. Where to save money for a house
A good old high-interest savings account is the best option to save money for a down payment. It’s not recommended to put money in mutual funds because you can’t predict the market with reasonable certainty.
In truth, you don’t want to risk part of the principal due to fluctuation in the market.
There are plenty of options to invest funds for a down payment. Here are the safest and most recommended:
High-Interest Savings Account
The best savings account should be FDIC insured with protection up to $250,000 of your savings in case of insolvency of the financial institution.
The best option is to go for an online bank account because they offer higher interest rates. Here is a list of online bank accounts to select from.
Certificates of Deposit (CDs)
Most CDs are FDIC insured just like high-interest savings accounts. Unlike savings accounts, term deposits are locked in for a term, and you can’t withdraw the money before it matured.
A Certificate of Deposit is a fixed-term investment available in the following terms, six months, one year, five years, or even longer – that offers a fixed interest during the term.
There is a penalty when you take funds out before the end of the term. This works in your favour as it prevents you from breaking the term and incurring a penalty. Align your term deposit investment with your plan.
For instance, if you plan on buying a house say in two years, save your lumpsum down payment funds in a two-year term deposit.
Money Market Account
A money market account is an account that pays interest on deposits based on prevailing market interest rates. There’s no risk to the principal amount invested but your balance earns interest monthly.
You can deposit cash in money market accounts through your local bank.
Tax-Free Saving Account TFSA (only in Canada)
This is the best account to save for a down payment as your capital growth, interest within the account aren’t taxed. You can invest funds in a Guaranteed Investment Certificate GIC, and high-interest savings account.
The safety of the principal is key when saving for a down payment. In fact, funds within the account can be withdrawn at any time without a penalty.
A tax-free savings account allows you to save or invest funds interest-free, earnings grow in the account tax-free throughout your lifetime. There are limits to how much you can contribute annually to the account.
In truth, it is the best investment account to save for a down payment because your capital growth and interest within the account will not be taxed. You can invest funds in a Guaranteed Investment Certificate GIC and high-interest savings account. The safety of the principal is key
III. How to Save Money for a House – Explore Unconventional ways
Copyright: Image by StockUnlimited
16. Explore Rent to own option
Rent to own or rent to purchase is an agreement in which the tenant commits to the landlord to pay rent monthly.
But the portion of the rent goes towards a down payment to purchase the rented property at a predetermined period and price. You sign a standard lease agreement, but part of your rent goes towards a downpayment.
Benefits of rent to own agreement
This is a great option if you have a difficult time keeping funds set aside for the down payment. It gives you time to save up for the down payment and keeps you motivated to purchase the house.
It allows saving if you have bad credit or a low credit score, and you would like to repair or establish it before buying a house. Additionally, it gives you time to prepare financially, and get ready for the responsibility of a homeowner. It is a brilliant saving plan to save money for a house down payment.
Risk of rent to own agreement
If you breach the contract or decide not to purchase the property at the end of the lease, you don’t get the extra funds you paid for the down payment. Therefore, the tenant has no control over the down payment, financing isn’t guaranteed upon signing the agreement, and it can be more expensive to purchase the house in a market downturn.
17. Take advantage of incentive programs for new home buyers.
Many programs offer incentives to new home buyers through various avenues. Some incentives include federal tax breaks, reduced interest rates, special loan facilities, closing cost assistance, and many more.
Most of these incentives are available in all the states in America. The programs are designed to make it easy for new home buyers to own a property. Some of these programs include:
- Good Neighbour Next Door-HUD program – A first time home buyers program that offers housing aid at 50 percent on a home’s list price in revitalization areas. Offered to law enforcement officers, veterans, firefighters, and emergency medical technicians.
- USDA Loans – Department of Agriculture Rural Housing Service. Homebuyers who live in rural areas could qualify for USDA loans and require zero down payment financing.
- FHA home loan program – A loan insured by the Federal Housing Administration. It’s eligible for borrowers with much lower credit scores and those with low money saved for a down payment.
- VA Loans – Are available for veterans, active duty servicemen and women. Also, their families may qualify for a zero down payment mortgage and require no mortgage insurance.
Also, check out local housing authorities to see if they have programs for first-time homebuyers or low-income households.
Stay up-to-date with the market cycles
If you follow through a plan on how to save money for a house, you adjust your expenditures, and it’s a great way to prepare yourself as a homeowner. Every industry has its highs and lows, and the real estate industry is no different.
There are lots of factors that influence the prices of properties. As a result, they can increase, as well as go down. With more knowledge of the real estate market will help you determine the best time to pull the trigger.
Finding the best ways on how to save money for a house isn’t an impossible task. However, dedication to following the plan and financial discipline are the hardest things to achieve.
Break down your savings plan into small manageable goals and measure your progress as you move towards them. Always have the reason WHY in mind as you jump through the hurdles and pass up on immediate gratification for long-term happiness.
Be determined to follow through despite the limited resources, because in the end, you will achieve your dream of owning a home.
We have outlined many avenues for saving towards your down payment. These options will help you improve your finances so you can save more to achieve your goals. Choose the ones that work best for you.
Once you have the down payment saved up; factor in all extra costs like solicitor fees, inspection fees, home insurance, and set up an emergency reserve for unplanned home repairs.
Also, get a mortgage preapproval done ahead of time before you start looking for houses. Finally, find the best realtor to help you to find a house that fulfills your family’s needs.
You may also like the following posts:
- How to Buy a Foreclosed Home: A Beginners Guide
- A Step By Step Guide: How to Get a Mortgage Pre-approval Before You Start Looking For a Home
- How to Pay Mortgage Off Quicker in 10 Super Easy Ways
- The Practical Guide to Purchasing Your First Investment Property
- Renting vs. Buying a House Debate: What’s Best For You?
John delph says
Thanks for sharing these important points. This article is really helpful.
Pachalo Mkandawire says