If you’re feeling cramped in your apartment or thinking about future long-term investments, you may be asking yourself if you’re ready to buy your first house. It can be incredibly intimidating, but it doesn’t have to be! Once you have all the necessary information and tools, you can begin your journey on the road (or driveway) to becoming a successful first-time homebuyer.
What is a Down Payment?
A down payment is the amount of money you provide the builder of the new house you plan to build. The rest of the money you owe is covered by your mortgage, which you will be paying back to the bank every month.
How Much Money Do I Need for a Down Payment?
In an ideal world, you should make a 20% down payment on your home’s purchase price. Putting down 20% allows you to avoid additional insurance payments and begin building home equity quicker than buyers with a lower down payment. However, a 20% down payment isn’t always feasible. Here’s the good news: the amount you need to save can differ depending on your location, the type of home you desire, and the type of loan you use. Traditional loans require you to make a down payment of at least 5% of the home’s purchase price, but you may be able to go as low as 3% with mortgage lenders like Frannie Mae and Freddie Mac and Federal Housing Administration (FHA) loans.
According to HomeAdvisor, the national average cost to build a house is $285,448. The graphic below suggests the amount of money you would need to save based on that purchase price.
Let out that breath you’ve been holding! The takeaway here is that you truly don’t need as big of a down payment as you may have originally assumed. However, you should also be aware of additional expenses on top of your down payment. Mortgage insurance is required for down payments less than 20%, which adds another .5% to 1% of the loan amount to your payment. You will also want to consider closing costs for your home. If you don’t have much room in your budget, you may be able to ask for seller assistance upon purchasing. This means that the seller will help you with your closing costs in order to limit your upfront payments.
Tips on How To Save For A Down Payment
Reduce Your Living Costs
Try downsizing in order to upsize in the future by looking into a smaller or less-expensive apartment.
Automatically save any unexpected money you receive. Whether it be a large work bonus, commission checks, tax refunds, or monetary gifts from friends and family, set it aside for your new home.
Cut Out Unnecessary Expenses
If you find yourself streaming TV shows and movies on via an Amazon Fire TV Stick, Netflix, or Hulu more often than browsing cable channels, you may want to look into cutting your cable altogether.
Embrace Your Inner Chef
Dust off your cookbooks and ready your foodie-inspired Pinterest boards in order to create delicious meals right in your own kitchen. Try packing your lunch for work or inviting friends over for dinner rather than going out. You’re sure to save on food, drink, and tip costs. Don’t forget to limit those spontaneous coffee shop runs, too!
Create an Entertainment Fund
This fund will allow you to set aside a certain amount of money every month for fun experiences such as enjoying a happy hour with friends, attending concerts, and going to the movie theater. Once the fund runs out for the month, focus on free things to do in your spare time.
Set Up a CD or Savings Account
These accounts will allow your money to accumulate interest while being saved for extended lengths of time. While they may not be a source of large revenue, they will provide you with a few extra bucks and ensure your new-home fund is tucked away for safekeeping.