Have you ever dreamed of owning your own home? Whether that be a condo in the city or a colonial in the burbs, even the most die-hard renters may find themselves peaking at online real estate listings every now and then, thinking of what life would be like. Sure, the housing crisis was scary, the stress of the home buying process is legendary, and the fact that there’s no landlord to call is a lot of responsibility but despite it all, the attraction is still there.
Taking charge of your financial future involves a lot more than simply opening a savings account or signing up for a budgeting app. It requires taking your dreams, translating them into concrete goals, and creating a plan to help you get there. So if buying a home is on your bucket list, it’s time to get started. And the best place to start: a down payment.
Down Payment Details
Unless you happen to be one of the lucky buyers who qualifies for special loan programs through organizations like the VA or USDA, every home purchase normally requires some sort of down payment. We typically hear about down payments of 20 percent of the purchase price of a home, but buyers have the option to put down more or less in order to secure their dream house. Most lenders require a downpayment of at least 3 percent depending on your credit history.
Making a down payment of less than 20 percent can be a big help to get you into a home sooner, but it comes with a catch. Actually, a few catches. In the eyes of a lender, a lower down payment increases the risk they will need to take on by giving you a mortgage. In order to compensate for this risk, you will likely pay a higher interest rate on the loan.
Your lender will also likely require private mortgage insurance (better known as PMI). This insurance policy is used to protect the lender in case you default on your loan. However, the monthly premiums will be paid by you, in addition to your mortgage payments. PMI rates vary, depending on the size of the down payment and the loan, from around 0.3 percent to 1.15 percent of the original loan amount per year. The less you put down, the higher the PMI.
Kickstarting Your Savings
Now that you know more about the ins and outs of down payments, how do you actually start saving for one?
- Determine how much house you can afford and how much down payment makes sense for you. Crunch the numbers using Zillow’s Affordability Calculator given your income and the amount of debt you have. Based on the prospective purchase price from an online calculator or the average price of homes in your area, calculate how much a 20, 10 or even 5 percent down payment would be. Which is the most reasonable for you? Also consider how this will affect the monthly payment on the loan (click on the “payment breakdown” tab in the Zillow calculator for details).
- Get intimate with your budget. Light a candle, open a bottle of red wine, and get to know the ins and outs of where your money is going. Identify specific areas where you can cut back or eliminate spending all together to make room for extra saving. Of course consider small changes like downgrading to a cheaper gym membership or cutting out your daily Starbucks run, but also think about big moves. Selling your car and using public transit or moving to a cheaper apartment can get you into your home even sooner.
- Give yourself a reality check. Think about your current housing costs versus the prospective monthly payment on your dream home. For instance, you may be paying $1,500 in rent but think you’d like to buy a home whose monthly costs will be more like $2,500 each month. Aim to save the difference between the two. In this case, save an extra $1,000 monthly. Not only will you get comfortable with the budget necessary to afford the house you want, but, you’ll also be building your down payment as you go. If you’re not able to make this savings target on a consistent basis, then you may need to readjust your expectations of how much house you can afford.
Even if you’re not 100 percent sold on home ownership, that’s okay. It’s a big decision and there’s no rush. No matter what you mother-in-law, best friend or realtor tell you, there is no perfect time to buy. But even if you’re still on the proverbial fence, preparing for the possibility of purchasing a home down the line is never a bad thing. Who ever regretted learning more about the home buying process, improving their credit score or saving something extra in their bank account?
Photo by Bernadette Gatsby