How to Save for a Down Payment on Your First Home
Whether it’s just around the bend or way off in the horizon, first-time homeownership is an integral step toward achieving the American dream. Saving a stash of cash substantial enough for a down payment requires discipline, awareness, and planning. Here are some helpful hacks to have you well on your way to feathering your first nest.
Do your research. Build your resources. Loans and interest rates can vary greatly, so shop around. In most major cities, non-profit housing centers offer plenty of home buying resources from credit counseling to loans. Everyone’s situation is unique; It is by no means a one-size-fits-all market. Having a solid grip on your own distinctive financial status as well as assembling the proper team is key.
Taking on a large project can feel like eating an elephant. In order to not become overwhelmed or discouraged by the sheer scope of buying a home, set benchmarks and incremental goals by which to measure your progress. If saving big bucks is your top priority, consider making some big changes, such as opting for a less expensive apartment or taking on extra work. Set an amount to save over the next couple years and break it down into monthly or bi-weekly installments. Pace it out and give yourself some incentive. When you reach a certain goal point, treat yourself to small luxuries for the job well done. Keep it limited to something that won’t break the bank—like a massage or spa treatment. Stopping to take stock and bask in your success will motivate you to keep going.
It’s intuitively obvious that saving up a nest egg is a pre-requisite for making any kind of big purchase. We recommend going through weekly, monthly and annual spending habits and really getting honest with the landscape of how far your hard-earned dollars are stretching. Make lists of fixed expenses. Little expenditures (ahem, that daily Starbucks run) can add up big time over the course of months. Get your credit and debts firmly under control. Keep your eyes on the prize and create a budget for each week. If you’re someone who can easily run up a tab on credit, switch to cash only. Make a weekly withdrawal and when you’re out, you’re out. It’s crucial to be firm and separate your savings from the rest of your cash flow.
Having positive reinforcement from a team of your family and peers will help you stay the course. Find people you trust to guide you through the process of loans and home ownership. Major life decisions, such as purchasing your first home, require plenty of forethought and sound-boarding. Ask for help and heed others’ advice. The world of real estate is fraught with endless options, so having a great loan officer, savvy realtor, and even just a family member who’s been there done will make the process infinitely more turnkey.
First-home exemption rules are there to help you if you know your rights. Boosting IRA contributions to fund a down payment can be a good start. The first-home exemption rule allows individuals to use up to 10K in IRA funds toward the first home without incurring a withdrawal penalty. That said, proceed with extreme caution. Any time you take money out of a retirement plan, you are forfeiting the tax-free growth indefinitely. There’s no going back.
How you save is equally as important as how much you save. Be intelligent and informed with where you keep your savings. Sticking with low-risk investments and high-yield savings accounts or a CD is wise. Credit unions and online banks typically offer better interest rates and the highest-yielding savings accounts. For long-term savers (three to five years), opt for high-quality, short-term bonds. Make sure it’s a no-load fund, and you are paying zero commissions. Avoid long-term bonds, as they leave you subject to market risk.
Some banks are aggressively looking for new customers and offer promotional rates and other benefits that are exclusively available when opening up a new account. Consider opening up a new account at a financial institution that offers a killer promotional rate for new customers. Keep an eye out for credit promotions. Rolling over your credit card balance to a zero-percent interest promotion for a year can equal big money.
New homeowners should set aside an appropriate amount of dough for unforeseen costs. Repairs, upgrades, and fixing little aches and creaks should be properly anticipated. If you’re anything like us, you’ll be dying to decorate. Be smart and make sure to prioritize necessary maintenance over pure aesthetics.
What is your favorite money saving life hack? Tell us in the comments below.
Opening photo: Tim Barber Ltd.