Do you want to buy a house? The first thing you’ll need to do is to save money for the down payment. But what is a down payment? The down payment is the money you pay to seal the deal when buying a house. In most cases, down payments must come from the buyer’s pocket.
You need to pay the down payment because it shows how invested you are in the house you’re buying. You will most likely get approved by mortgage companies if your down payment is paid in cash.
And the best way to pay your down payment is by saving up for it. Saving money will prove that you are a serious buyer and that you can pay your monthly mortgage. It’s important to remember that the bigger your down payment is, the lower the monthly house payment will be. Thus, making it easier for you to pay your monthly home mortgage.
How Much Should You Save?
Of course, people don’t like having debts. The primary reason is that credit card bills, student loans, and car loans can bind up our income, leaving us with title money to spend on essential things.
So the question here is, how much should you save for the down payment? First of all, you don’t need millions of dollars to close a deal and get your dream home. However, you need to think carefully and be very careful to get the right amount for a down payment. Here’s how to do it:
Compute Your Monthly Mortgage
The first thing to do is determine how much money you can pay for a monthly mortgage payment. Ideally, the universal rule is to spend 25% or less of your monthly income on your monthly home payment. Even though you get the best mortgage rates, it’s still safer to spend within your capacity.
If you use too much of your income on your home loan, you might end up with less money to spend on bills and necessities. Besides, you still need to save up for your future and emergencies.
To determine how much your monthly mortgage should be, compute how much you earn each month. Next, multiply the number by .25. The amount that will appear will be your target monthly payment or less.
Compute the Total Mortgage
At this point, you have to decide the type of mortgage that suits your income. Generally, homebuyers prefer the 15-year rate as it could save you a thousand dollars compared with the 30-year period.
Down Payment Goals
After determining how much you can pay for a monthly mortgage, it’ll be easier to determine the percentage of the down payment you can afford. An ideal percentage is 20%, as it can lower down your monthly mortgage rates.
Once you know how much you need for the down payment, you can start saving for your dream home. Take note of the amount you need to save and pin it in your fridge or office desk. That way, you will be reminded of your goals every day.
Other Costs to Consider
First-time home buyers should know that apart from the down payment, there are other expenses they need to prepare for. It’s important to educate yourself about the “extra fees” as well.
Private Mortgage Insurance (PMI)
PMI is the cost added to the monthly home payment if the buyer gave less than 20% as a down payment.
Closing fees usually cost between 2% to 5% of the total mortgage value. The buyer usually covers it, but some sellers agree to cover it instead.
Appraisal and Inspection Fees
Before signing the deal, the lender will have the home appraised and inspected. These services primarily cost $300 each
Saving up for the down payment can be overwhelming. Understandably, you want to reach your savings goals as soon as possible. But overdoing it may lead you to many financial problems. The best way to save money is by starting with small amounts.
If you have no other loans, saving up for the down payment will be easier for you. You can set a monthly budget for grocery, food, shopping, and leisure, then keep the remaining money on your savings account. Over time, you will get used to spending smaller amounts, and you can save bigger than you used to.
Furthermore, there are many ways to raise money for your down payment. Here are some creative ways so you can reach your savings goals in time:
- Keep track of your monthly savings. Know that the amount should grow every month.
- If you receive extra money (like bonus or side hustle salary), throw it into your savings.
- Create a separate savings account. Don’t use your regular bank account so you will not be tempted to use your saved money.
Buying a house is a dream come true for everyone. But it takes a lot of commitment and dedication to afford one. Start saving up for your down payment today so you can finally live in your own home very soon.