If you're planning to use a mortgage to finance the purchase of your home, it's essential to have enough money in savings for your down payment. Depending on the type of mortgage you choose, you'll typically need anywhere from 3.5 to 20 percent of the home's purchase price.
Our real estate agents recommend creating a plan to help you save the money for your down payment. Start by opening a savings account specifically for your down payment and follow these tips.
- Develop a Timeline for Your Homebuying Plans
Before you can calculate how much you'll need to save, you need to decide when you want to purchase a home. This will allow you to make adjustments to your budget and income that match your buying timeline. For example, assume that you want to start the process of purchasing a home in six months. You want to have a down payment of $7,000. Over the next six months, you'll need to put away $1,167 each month to meet your goal. Or, if you want to buy a home in a year, this means you need to save $584 every month.
- Look at Your Budget
Once you know how much you need to save, it's time to write down all your expenses and income. Be thorough and realistic; while it's wise to reduce your discretionary spending, it isn't realistic for most people to go an extended period with absolutely no money devoted to outings and "fun" expenses. Assume that each month, you spend $400 on eating out, $200 on shopping, and $250 on vacations, for a total of $850. If you can reduce this amount to $450, you'll have $400 each month to put in your savings account. Over six months, this is $2,400.
- Track Your Spending
A budget is of little assistance if you don't stick to it. Monitor your spending (either via an app, a bank service, or keeping track of your expenses with a spreadsheet or even a pen and paper). If you overspend, try to reduce your expenses somewhere else to cover the overage. For example, if you spend $200 more than you budgeted on gifts, cut back on dining out, activities, and grocery budget by that amount.
- Increase Your Income
Increasing your income is another way to meet your monthly savings goal. Assume that you work an additional 6 hours a week and clear $15 an hour after taxes. This is an extra $90 a week or $360 a month. After 6 months, you'll have saved approximately $2,160.
- Save Any Unanticipated Money
Most people receive at least a little bit of money each month that they didn't anticipate. You might get a bonus at work, receive a cash gift, sell items you no longer use, or collect a refund. Save any and all unanticipated money in your savings account. If you can save $100 a month in unanticipated money, this is $600 over 6 months.
- Adjust Your Tax Withholding
For the 2020 tax year, the average tax refund was $2,800. If you adjust your tax withholding to have less withheld, this is an extra $234 a month. Over 6 months, this is $1,404. Or, if you're not able to adjust your withholding, your tax refund is an excellent windfall for your savings account.
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