Saving is Hard. Here’s How to Make it Easier.
Buying a home is considered by many to be the single greatest financial investment that you can make, and the quickest way to amasse financial wealth. For years, Millennials lagged behind the averages for older generations in home ownership, when they were at the same age. This is due at least in part to bad luck – Millennials entered the job market with thousands in student loan debt, right as the country swung into the Great Recession. This poor timing left many Millennials earning less than Gen Xers and Boomers were at the same age, and carrying significantly more debt from wildly ballooning tuition prices.
But the failure to buy real estate also stems from lifestyle choices. Millennials are getting married later and having fewer children overall, which historically have been the two biggest reasons for buying a house. Today, the number one reason cited by Millennials for buying a house is to have a bigger space and a yard for their dog(s).
Thanks to a stable economy and continued job growth, the number of Millennials purchasing homes is on the rise. For a growing number of first-time homebuyers, regardless of age, the most daunting part of buying a house is the downpayment. In many cases, there is a lack of information about how down payments work, or a flat-out misunderstanding. It’s hard to save up for something you don’t even understand!
So, what is a down payment, and how much does it cost? A down payment is an amount that you pay towards the house, as collateral on the loan. This payment is usually represented as a percentage of the total purchase price of the home. Most people think they need to have 20% of the purchase price saved for the down payment, but in many cases, this is not correct.
In fact, down payments can range from 3.5% up to 20%. The reason that the 20% down payment number is repeated so frequently is that it is the amount you have to put down to avoid paying mortgage insurance (a small fee that is rolled into your monthly payment that protects the lender in the transaction). The type of loan you take out will play a big part in your down payment. For instance, an FHA loan may only ask for 3.5% down (but will require mortgage insurance), while a conventional loan might require 20% but not need mortgage insurance. Both FHA and conventional loans can range from 3.5% – 20% down payment requirements, and anything under 20% will require mortgage insurance, regardless of loan type. We strongly recommend that you consult with a mortgage broker to learn more about what to expect for your down payment.
Try These 8 Simple Steps to Save Up Your Down Payment:
- MAKE A BUDGET: A realistic and thorough budget should be your first step whenever trying to save money. It’s difficult to save when you don’t know where your money is going in the first place! Free apps like Mint will connect to your accounts and give you a detailed look at where your money goes, and make it simple to set budgets.
- SET A REALISTIC SAVINGS GOAL: Once you understand your spending and create a budget to stay within your means and goals, you’ll be able to figure out how much money you can reasonable save on a weekly or monthly basis. Based on your budget, figure out where you can cut back on spending (like eating out three times a week instead of four, brewing your coffee at home, or cancelling that gym membership you haven’t used for the last 6 months – no judgement). Don’t plan on saving $500 a month when you can only consistently save $200. Creating unrealistic goals is a great way to fail. Slow and steady wins the race!
- GET PREQUALIFIED: Prequalification is crucial in the home buying process. Many mortgage brokers allow you to prequalify on their website, before you ever pick up the phone to call them. You fill out a short application to find out a.) if you qualify, and b.) for what amount. This way, you’ll have a better idea of what kind of loan you’ll be using and how much house you can afford. Once you know that, you’ll know how big of a down payment you should be expecting to make.
- LOOK INTO HIGH-YIELD SAVINGS ACCOUNTS: Once you establish a budget, determine a realistic savings goal each month, and find out how much you prequalify for, you’re going to want to get the most bang for your buck when you’re saving. High-yield savings accounts generally pay a higher rate of interest than a traditional savings account. Check your local Credit Unions, which typically offer a variety of options for savings. As an added benefit, when your savings is housed at a different bank than your main checking account, it’s harder to access and spend frivolously.
- LOOK INTO A CERTIFICATE OF DEPOSIT (CD) ACCOUNT: Certificates of Deposits, commonly called CDs, pay out higher interest rates in exchange for leaving the funds untouched for a period of time (typically six months to a year). This is a great option once you’ve saved up a chunk of money, and know you won’t need to access it for at least six months. If you’re hoping to buy a house in the next 3-6 months, stick to the high-yield savings. If you’re playing the long game and are saving for something 6 months to a year (or longer) from now, a CD might be a good choice.
- READ UP ON YOUR 401(K) AND IRA: If you’ve been contributing to a 401(k) savings plan, or if you have an IRA, you might be in luck. Many 401(k) plans allow you to withdraw funds for the purchase of a home without paying a penalty. Check with your 401(k) provider to find out the specifics of your plan and any potential penalties. If you are a first time home buyer, let your provider know – they may have different rules or waive penalties to aid first time home buyers. This is especially common with IRAs.
- RESEARCH DOWN PAYMENT ASSISTANCE PROGRAMS: Don’t overlook the potential benefit of down payment assistance programs. These programs are designed to help buyers overcome the hurdle of saving up a chunk of cash for their down payment. Most programs are geared toward first time home buyers, and typically have a maximum household income cap. These programs usually come in two forms: a grant that gifts the funds the to recipient, with no repayment ever; or as a deferred loan. There are a variety of programs available in Spokane with different requirements and assistance offerings.
- STICK TO THE PLAN: However you choose to save your money, make a plan and stick with it! Slow but consistent saving will beat out erratic and unsustainable savings plans every time. Don’t lose sight of the goal; you’ll be scheduling movers before you know it!
Buying Your First Home in Spokane
Buying your first home is exciting and a bit intimidating! That’s why we specialize in helping first time home buyers find and fund their dream house in Spokane. We understand that buying a home is more than a big transaction – it’s a huge milestone, too. To guide our clients through the process, we focus on education and support; we want you to feel empowered to make a great decision.
Carrie Meyer, leader and head Realtor of the Real Estate Agent Spokane Team, is registered with the Washington Association of Realtors, the Spokane Association of Realtors (SAR), and has been a certified Paralegal for over 30 years. She is an expert at writing, negotiating, and explaining real estate contracts. Contact Carrie today at (509) 868-1077 to start searching for your home in Spokane!