By Laura Ferraro, Senior Vice President
There are many steps you will take in preparation for buying a home and saving for a down payment is one of the most important. A down payment is the initial portion of the full price that is paid to purchase something bought on credit.
A home down payment is typically combined with a mortgage to fulfill the total purchase price of a home. In addition to your down payment amount, your credit score, credit history
, total debt and annual income will influence how much mortgage you can qualify for.
Most mortgage lenders require a minimum cash down payment of 20 percent of the full home purchase price or, if you cannot afford the 20 percent down payment, you will be required by your financial institution to obtain private mortgage insurance
which protects the lender in case the borrower defaults on mortgage payments.
If you’re purchasing a $250,000 home, that means you will have to save up to $50,000 for a cash down payment. $50,000 is a lot of money and it can take some time to save that amount. The more money you put down the less you will need to borrow, and the lower your monthly mortgage payment will be so you might want to save more than the standard 20 percent down. This usually takes some planning and saving over time to reach this important milestone. Fortunately, there are many ways to manage or cut expenses and increase savings.
To help you get started on saving for a down payment, we’ve put together 10 tips to save money.
- Create a budget and set goals. Get a crystal clear picture of how much money you have coming in and how much money you are spending. Find areas in your budget where you can save and set financial goals to reach your down payment amount.
- Curb your spending. Make coffee and lunch at home instead of buying it. Clip coupons and comparison-shop to get the best price before making any purchases. Biking and walking instead of driving, or planning your route with multiple stops, can help save on gas. Watch a movie at home instead of going to the cinema. And lastly, make sure your utilities are running optimally. Don’t hesitate to get creative and find other ways to save that fit your lifestyle!
- Reduce your monthly debt and increase your savings. You can cut back on some recurring monthly expenses such as cable or a gym membership in search of free alternatives. For example watch TV shows online using Hulu and exercise outdoors – especially during the warmer months. Also, shop around for different service providers for other recurring services. You might be able to get introductory deals that save you some money for a year or two.
- Consider consolidating your debt. If you have a lot of debt, consider consolidating debt to reduce your monthly payments. You can consolidate just about any debt from credit cards to car loans. Loan consolidation isn’t for everyone, so make sure it’s right for you.
- Use cash or a debit card instead of using credit. Set a weekly budget for cash expenses and carry that amount of cash in your wallet or use your debit card. When spending cash, consumers often spend less. Reducing or eliminating the use of your credit cards will help you pay down any debt you may have and add more money to your savings.
- Open a separate savings account. Opening a savings account specifically targeted for your down payment can help build additional savings. You can also set up automatic transfers from your checking account or another savings account to contribute to this savings account on a regular basis.
- Liquidate your assets. Sell that old car, boat, motorcycle or other collectables that you no longer want or need and deposit the money into your savings account.
- Try earning some cash on the side.Taking a side job or earning some extra money on the Internet via freelancing sites or retail sites for homemade and vintage goods like Etsy, is easier than ever. You can also sell items you no longer need or want using auction sites like eBay.
- Ask for a raise. If you’re due for a raise, don’t hesitate to ask for one. Keep good records to support the reason you are asking for a raise and be thoughtful about your approach. Maybe you’ve taken on new responsibilities or helped the company earn more revenue. Do research on what your position earns in the marketplace and know how much of a raise you can expect.
- Check your credit early in the process and work on improving your credit score ahead of time. A credit score can impact your mortgage interest rate, reducing the total costs of the mortgage and it can also help paint a good financial picture for your lender in the event you cannot afford a 20 percent down payment.