Down Payment Savings Tips for the Newbie Home Buyer

by John Stephens 31. July 2014

Down Payment Savings Tips

Saving enough for a 20% down payment on a home can be one of the toughest financial challenges most people will ever take on. With the median existing U.S. single-family home price at about $213,000, that means pulling together more than $40,000 – a veritable mountain of cash.

Yet reaching that goal can be done. It just takes planning, patience and discipline. Here are some tips to help you map your path to home ownership:

Set a Goal

What you need depends on local home prices and how much you can finance. For many programs, a 20% down payment is needed to avoid paying private mortgage insurance (PMI). Not paying PMI can save hundreds of dollars a month and enhance your buying power. Generally, your monthly mortgage payment shouldn’t be more than 28% of your gross income.

Once you’ve figured out how much you’ll have to come up with when it comes time to buy, you can draw a plan to get there based on your income and expenses. Keep in mind prices change, so check the market regularly to be sure you’re saving enough.

Open a New Savings Account

Start a house-fund savings account and have part of your paycheck deposited into it. Safely tucking away the money like this may help you keep your fingers off it, even under tempting circumstances.

Cut Your Expenses

It's easy to get comfortable with routine monthly expenses, such as the cost of cable television, phone services and insurance. But often, you can find a way to pay less after taking a close look at what you’re getting and what you really need.

You may find ways to save money on insurance, for instance. Some consumers are dropping cable in favor of online TV from companies like Netflix, and there may be an alternative phone plan that will net you another $10 a month. Be brutal when it comes to discretionary expenses like manicures, haircuts, memberships and subscriptions.

Don't Forget the Incidentals

It may seem like a major chore, but taking the time to determine all the ways you spend money over a typical month – right down to the coffee breaks, candy bars and other incidental expenses – can help identify ways to save.

For instance, you may be able to put aside an extra $20 a week just by making a sandwich each day instead of buying lunch. Skip the doughnut, bring a thermos and add another $10 – totaling $120 a month extra for your savings.

Keep the Change

Little things – including coins – add up. Collect the pennies, quarters and other coins that come your way. Deposit them each month. Some banks, including several 1st Mariner branches, let you avoid the hassle of sorting and rolling loose change. You may be surprised at how much you come up with each month.

A Taxing Experience

If you can’t keep your mitts off your house fund, consider increasing tax withholdings from your pay. That puts the Internal Revenue Service in charge of part of your money, but you’ll get the excess back after filing your tax return.

Make sure your refund is deposited directly into your savings account too – you don't want to be tempted by a big check. Once the cash lands in the bank, consider investing in a certificate of deposit. CDs generally require you to keep your hands off the funds for the term of the deposit, and they generally pay a much better interest rate than a standard savings account.

More Work

It may seem excessive to go moonlighting, but if you work 9-to-5 weekdays, you may be able to significantly shorten the time it takes to reach your goal by picking up a part-time job. Using a particular skill or hobby can be another way to enhance income and savings – sell your work, look for performance gigs, teach others. If you have an advanced degree, consider tutoring.

Long Haul

Keep in mind that this is probably one of the toughest personal-finance nuts you’ll ever have to crack, so give yourself time.

John Stephens is a Los Angeles-based writer and editor covering banking and finance for NerdWallet. He previously worked for the Huffington Post and Bravo.

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