AdviceIQ: Saving for a down payment on a home
If you are financially ready to be a home owner, now the most critical piece of the puzzle is the down payment. Coming up with enough cash for it is the biggest challenge of home buying. So once your finances are in order, it's time to focus on saving.
You need to have at least 20% of the home's purchase price for the down payment. If you show up to the table with less than that, the lender sees you as more risky and may require you to buy private mortgage insurance (PMI). It is a way lenders protect themselves in case the borrowers default on their loan.
In addition to helping you avoid PMI, a larger down payment means you borrow less, which means smaller, more manageable monthly payments.
If you're committed to building your first home fund, try these strategies:
• Establish a special savings fund. This big goal deserves its own savings account. Look for one at a credit union or online bank that offers at least 1% of interest. It may not be much, but it's better than nothing, and it allows your savings to get to work by earning more.
• Create a budget and make room for savings. If you don't already use one, establish a budget and stick to it. This makes it easy for you to track — and cut — discretionary expenses so you can save more. Make sure you include how much you save each month toward your home down payment. You can then track and celebrate your progress, which is a motivating factor all on its own.
• Slash unnecessary expenses. What are the little luxuries that you don't really need? Maybe you pay $100 a month for a nice gym membership, but there's a bare bones gym down the road that only charges $20. Or maybe you enjoy trips to your local Whole Foods when you can shop at a lower-cost grocery store. Change your expensive habits for cheaper alternatives. Then, track your new spending habits. You should create a surplus. Be sure to transfer that to your home down payment fund.
• Hang on to extra money. Whenever you receive a bonus, gift or any other kind of extra income, put it straight into your home down payment fund. If you feel like you just have to treat yourself, divvy up the extra cash: put 80% into your savings and spend 20%.
• Find ways to increase your income. There is only so much you can cut from your current budget. If you hit that wall, look for ways to boost your income. You might be able to work overtime or pick up additional shifts. You could ask for more and negotiate a raise with your boss. Or you could establish your own sideline and earn extra money in your spare time, outside of your day job.
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Mary Beth Storjohann, CFP, is the founder of Workable Wealth in San Diego and a member of the AdviceIQ Financial Advisors Network, which is a Paste BN content partner offering financial news and commentary. Its content is produced independently of Paste BN.