It’s one of the most daunting tasks out there, saving thousands of dollars to buy a home, and for a first time homebuyer saving for a down payment can be a long process. Here are a 7 of the best tips we have to help you save money so your ready when it comes to buying a house.
Identify a comfortable purchase price
Knowing what you can afford as a purchase price is a key element in saving, it allows for you to set your goals. According to Interest.com, you should not look above a maximum of 28% of your monthly income for all your housing expenses (mortgage, insurance, property taxes, and condo or association fees). Once you get a price set, you should aim to get as close as you can to 20 percent of your purchase price to avoid having to pay a PMI. Another great way to look at how much you can afford comfortably is to work back from what your current cost of living is and look at what you can afford long term, for example, if you pay currently $1,000 a month in rent and are looking at a 30 year mortgage at a 4.27% interest rate you’re looking at around $115,000 as a comfortable price for a house.
Setup a Special Savings Account
Setting up a special savings account for your down payment is a great way to keep your regular savings separate from what you are planning on using for your down payment. High interest savings accounts like SoFi’s Money, are perfect because of the high interest rate returns you can get (2.25% APY) and help keep your savings safe. Avoid investing your down payment savings as this can be a risky move.
Identify your Sources of Debt
Though it doesn’t directly help you save for your down payment, now is a great time to start working on your credit score. Identify all the sources of your debt (auto loans, credit card debt, private student loans, etc.), and look to minimize the impact of that debt on your ability to purchase a new home. Using a free credit score checker such as Experian, can help you keep an eye on your score without hard inquiries.
External Sources of Funding
When you’re getting closer to your goal you may begin to look at some external sources to get you over that final hump towards your down payment goal. Gifts from family members, retirement plans that allow for you to take a loan out against your invested amount, and cashed in stocks are all places to get that little extra over the hump. Be cautious though when using some of these sources, because they may lead to additional payments or tax implications that you will have to pay for down the road.
Don’t Forget Closing Costs
One very common mistake that first time homebuyers make is to forget about the closing costs on a new home. Closing costs can range from 2% – 5% depending on where the home you buy is. Some individuals will have the closing costs surprise them and cost them in the long term with higher interest rates and PMI’s. Be aware of what your average closing costs are, and if you aren’t sure you can always consult a closing cost calculator.
Not rushing to a purchase will help you avoid spending outside your limit and potentially save your thousands if not tens of thousands of dollars. Having a solid down payment, funds to cover the closing costs, and a quality credit score can go a long way in alleviating some of the stress associated with buying a new home. Remember that the more you save, the more options you have in the long run, from reducing your overall mortgage by putting more money down to buying percentage points off of your mortgage rate, there’s more options the longer you save.
Have a Resource
The best way to help guide you along the process when you are starting this journey is to reach out to a financial advisor or a Certified Public Accountant. They can help you plan for your financial goals and help you assess how much of a home you can afford. Once you get close or are at your goal, researching and identifying a real estate agent that can help you find a great home within your price range. Your real estate agent, like the professionals at Collier & Co Real Estate, can be an excellent resource in guiding you through the stages of buying your next home.
Overall, if you keep these tips in mind when you start considering buying a home you can save yourself a ton of time, heartache, stress, and money when you finally close on your perfect home.