So
You Wanna Buy a House? Step
2: The Down Payment
Alexandr Dubovitskiy/iStock
Scratching
together a down payment is probably the most daunting hurdle to buying a
home—and there are boatloads of them! But that’s why we’ve
launched our 2016 Home-Buying Guide, a
series of articles giving you the critical intel you need to buy your own
house, step by step. This is the perfect time to start your search in earnest.
Last
week in Installment 1, we covered cleaning up your credit score. This week,
we’ll unlock the secret to amassing a mountain of cash for the down
payment.
Yeah,
you already know that Rome wasn’t built in a day. The same holds true for
building a down payment. It takes time. But as long as you grease the
gears early (like now), you’ll barely notice you’re saving
until—boom!— one day in the foreseeable future you’ll be sitting on
a pile of money that could pave the way to homeownership … maybe even in time
for peak home-buying season this summer.
Sound
good? Good. Here’s
how to get started.
Trim those quiet, unnecessary expenses
OK,
let’s shift those preconceived notions. Contrary to popular belief, saving
for a home isn’t mostly about grueling sacrifice—e.g., holing
up in your apartment under a bare light bulb, eating ramen, and piggybacking
off your neighbors’ Wi-Fi.
“It’s
about a lifestyle change,” says Travis Sickle, a financial
adviser with Sickle Hunter Financial Advisors in
Tampa, FL. A more sustainable strategy, he says, is to pinpoint
your silent money siphons that you barely notice. Odds are you could
try some of the following cost-cutting measures without feeling the
pinch:
- Replace your $250 monthly cable
service with a $10 Netflix standard streaming account, and you’ll save
$2,880 per year.
- Cut that languishing gym
membership—at $50 per month, you’d save $600 a year. Go running instead!
- Packing lunch
will save you about $60 a month—or $720
a year.
- Bike to work. For a
10-mile commute, biking can save you around $5 a day, according to Kiplinger—or
$1,250 a year.
- Start a coin jar. Saving
all your loose change can have a big impact—up to $700,
according to financial blogger J.D. Roth.
- Turning down your thermostat
just 3 degrees could shave almost 10% off your
electrical bill, netting you $20 a month on a $200 bill,
or $240 a year.
- Curb those dinners and
drinks out at restaurants, which can quickly add up. If you typically
shell out $40 three times a week, reduce that to one evening a
week, and you’ll save $80—or $4,160 per year. (Bonus: It’ll make those
times you do indulge more special!)
And
if you and your significant other team up and try all of the above, that would
amount to $10,550 per person, or $21,100 in one year’s time. Just remember that
when you’re thinking of ordering a second glass of artisanal craft beer.
Open a dedicated account
If
you don’t have a savings account, now’s the time to open one. A checking
account is great for daily expenses, but when it comes to saving money—well,
they don’t call them savings accounts for nothing. You’ll earn
interest on your balance, plus there’s a lot to be said for the mental
benefit of having a specific place to stash your down payment.
While interest rates haven’t been very impressive in recent years (though,
you’ll be grateful for that when it comes time to get a mortgage), it’s still
great to have a dedicated account where you can see how you’re progressing
toward your goal.
Financial
planner Bob Forrest of Mutual
of Omaha points out that CDs and money market accounts offer
higher gains than savings. You’ll need a larger minimum balance than for a
regular savings account, but your goal is to make it grow, not shrink, right?
If you’re using a CD, just make sure you don’t withdraw the money before
the time is up or else you’ll face some stiff penalties.
Automate your savings
If
you’re struggling to put enough money away because of the constant
temptations to blow your paycheck, consider automating the process. Ask your
employer if you can have your paycheck deposited into multiple accounts—if so,
instruct it to send a certain percentage of
your salary directly into your savings account. Or go through your
bank, setting up automatic withdrawals from your checking to savings account that
will force you to keep spending in check.
Tap into your IRA
Another
great place to stash your cash? A traditional or Roth IRA,
says Forrest. In addition to being a tax-friendly retirement vehicle, it
allows you to withdraw up to $10,000 for a home. While withdrawals
from a traditional IRA will be taxed, a Roth IRA you’ve owned for more
than five years won’t be taxed at all, as long as you’re a first-time home
buyer. Just be careful with this method, though, as you will be denting your
retirement funds. But combined with other savings, it can quickly add
some heft to your growing nest egg.
Check out down payment assistance programs
Depending
on the city and state you live in, you may be eligible for down payment assistance programs,
which provide money to help people buy a home. Go to Down Payment Resource to
find programs you might be eligible for. Most offer up to $15,000,
typically in the form of a grant or low-interest loan. Most require your
income to be below the area median. But even if you make
more, do your research—there are programs that provide funds for
higher-income households.
Once
your down payment is on a roll, it’s time to start looking for a
home—and to do that, you’ll need to determine exactly how
much house you can afford.
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