Copyright © [2016] [Jamie Wiebe] realtor.com
Scratching together a
down payment is probably the most daunting hurdle to buying a home. Yeah, you
already know that Rome wasn't built in a day. Well, the same holds
true for building a down payment. It takes time!
Still, 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. 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!)
Open
a dedicated account
Bottom
of Form
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. 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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