Many young families aim to buy a home. But the significant roadblock in the way of this goal is the down payment. The dollar value is scary because it is generally in the tens of thousands of dollars. In the United States, a typical home costs about $350,000, requiring a 20% down payment of $70,000 to obtain a reasonable mortgage rate and avoid paying private mortgage insurance (PMI). However, achieving the first step of saving for a home down payment and subsequently reaching your goal is possible with some planning, time, and effort.
According to the Zillow Home Value Index, the standard home value is $357,000, meaning future homeowners must save $71,400. Add in closing and first-year maintenance costs, and the number goes up a few thousand dollars. Besides the initial amount, future homeowners must remember buying a house involves a financial commitment over many years.
However, saving for a home down payment isn’t difficult for young families. It just takes some planning and discipline.
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Saving for a Home Down Payment Isn’t Difficult
Create a Goal
If buying a home is your goal, then saving for the future is a must. Most young families probably do not have $75,000 sitting around for a 20% down payment and the additional costs of buying a starter home.
Thus, they must save money. Suppose the objective is to save $75,000 in five years for a home down payment. This amount requires putting away $15,000 per year or $1,250 per month, an intimidating amount for some and seemingly out of reach. In that case, add another year or two. A goal of $75,000 in six years means saving $12,500 annually or $1,041.67 monthly, a more accessible value.
Otherwise, a young family can lower their objective down payment to 5% or 10% of the potential house price. Other options exist too. Some lenders require only a 3% down payment, but you must be prepared for a higher interest rate on your mortgage. Also, remember that a lower down payment will require a PMI payment. Another option is that VA Home Loans do not ask for a down payment, but only veterans and service members qualify.
Automate Your Savings
“do not save what is left after spending, but spend what is left after saving.”
His quote is another way of saying the famous phrase espoused by financial advisors, “pay yourself first.” They often discuss retirement plans, but the same concept is valid for a home down payment.
Use a separate savings account to save 8.33% of your monthly annual objective. Alternatively, if you are paid every other week, put aside half that value or 4.17% of your weekly net pay into a savings account.
The concept is simple. Establish an automatic transfer to an independent savings account after each pay period. Young families who live frugally will probably not miss the money, assuming they have enough for their daily expenses.
Tax Refunds and Raises are a Bonus
One way to reach a home down payment savings goal faster is to leverage tax refunds or raises. Most people do not include this money in their monthly budgets. Often, they use it for big-ticket purchases or vacations. Instead, use it toward your home down payment.
The Internal Revenue Service (IRS) says the average tax refund was $3,039 in 2021. Assuming a family receives the same sum annually over five years, they collect $15,195 over that period. Therefore, the $75,000 goal is more attainable now. In fact, they must now save a lower amount of $59,805 in five years. This lower dollar value results in $11,961 per year or $996.75 per month of required savings.
Likewise, raises can be used to accelerate your savings rate and reach the goal earlier. Suppose your salary increases by 2%, then increase the savings rate by 2%. The $1,250 per month in year one becomes $1,275 in year two. Your monthly savings rate becomes $1,380.10 or $16,561.21 annually in year five, assuming a 2% yearly raise.
Cut Your Monthly Expenses
A low-hanging fruit is to lower your expenses, increasing the difference between income and costs each month. Review every budget item and decide if it’s really needed or not. A family could potentially save tens to hundreds of dollars per month. It does not sound like much, but cutting $10 off a monthly bill, like cable, saves an extra $120 annually.
Questions to ask yourself are about the cost and necessity of streaming services, cable, breakfast, coffee, lunch, cell phone plans, insurance, travel, and restaurants. Depending on your habits, squeezing expenses out of these categories tends to be easier.
Indeed, eating out is more expensive than making your own dinner or bringing your own lunch to work. The typical American spends $2,375 on eating out and takeout. Reduce that amount by 10%, adding $237.50 to the annual savings goal.
In another example, the average vacation costs roughly $3,838 per week for two people, and not taking a vacation for one year significantly increases your savings.
Live with Your Parents
Another option is to move back home, which can save a lot of money because of no rent payments. In the United States, the average monthly rent is around $1,751. Combine that with savings on electricity, gas, water, etc., and the monthly dollar value is at least $2,000. Saving an additional $24,000 per year beyond your target of $15,000 means the $75,000 goal is achieved in a little more than two years.
Be Disciplined in Saving for a Home Down Payment
Saving for a home down payment require discipline and planning because it takes a few years. Besides your savings rate, other variables influencing how quickly you reach your goal are income, the house’s price, and the plan’s dollar value. First-time home buyers should know that the initial outlay for a home is usually more than expected, so save a little more than needed.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.