How to Start Saving for a House

Want to purchase a home? Even with the housing market pretty much back from the doldrums of the 2008 Great Recession, real estate experts say that there’s still plenty of room to the upside if you purchase a home now.

But many first-time homebuyers underestimate the amount of money they will need up front to purchase their dream home. As a rough estimate, closing costs will run between 2% to 5% of the home’s value and at minimum, you’ll probably need 3.5% down. This rate is for an FHA loan, for lower income earners. However, those loans are harder to get than one at 5% down (see Score a Cheap Mortgage). On a $200,000 home, you will need around $16,000 when you close. This amount is the bare minimum, according to realter.com.

Next question: If you don’t have it, how will you save for it?

If you need the money now and don't have it, this is not the time to buy. You don’t want to cash in any of your retirement savings (see 5 Essential Retirement Savings Accounts). If you’re like most people, your retirement accounts are probably running a little low so you’ll need all the money you can get in there. You could ask family members for a loan, or if you have company stock or an investment outside of retirement, take the money from there. Otherwise, it's time to focus on buying a house in the nearest possible future. 

6 Ways to Afford That House 

Waiting e a year or more gives you many more options for assembling the down payment and cash for other moving expenses: 

1. Get a smaller apartment. Assuming you’re living in an apartment, consider moving to a smaller one or one in a cheaper neighborhood. This works particularly well if you’re single or living with somebody and have no children. Even better, live with your parents for a year. Getting rid of a $900 housing expense would save you $10,800. You may not need much more than that depending on the size of your home.

2. Don’t spend your windfalls. Did you get a company bonus? How about a tax refund or some other unexpected sum of money? Put all of that cash toward your down payment, assuming you don’t have delinquent or high-interest debt.

3. Find a part-time job. When you have to save a sizable chunk of money, it’s going to be inconvenient. Can you get a part-time job and put all of your paychecks into your house fund? Or can you freelance in a skill you already know? Don’t just look for ways to save, also look for ways to earn.

4. Save less for retirement. You might be well on track to reaching your retirement goals. If that’s the case, maybe scale back. If you’re matching your 401(k) up to the 6% company match (or however much your company matches), put the rest of your money into your house fund. But don't stop putting some money aside for retirement. Saving for your later years is more important than saving for a home, so don’t take money from your retirement for your home.

5. Little Things Add Up. Two fewer cups of Starbucks coffee a week plus eliminating going out for lunch twice each week can save you a lot of money over the course of a year. Let’s say that your coffee is $4 a cup and lunch is $10 per, that means an annual saving of $1,456.

6. Cut out expenses. Can you cut the cord on cable, get a cheaper cellphone plan, use the road for workouts rather than the treadmill at the high-priced gym? Nobody wants to say it out loud, but most people have plenty of places to skimp on or eliminate expenses. It won’t be convenient and you may miss not having them, but it’s necessary if you're serious about saving.

The Bottom Line

Ask yourself this question: Is my short-term comfort more important than buying a home? If your answer is no, live well below your means now so you can live better once you’re in your home. Saving more now means you'll have more for the down payment, which will lower your mortgage payment – sometimes by hundreds of dollars per month. It’s true that interest rates may rise while you’re waiting, but probably not enough to outweigh the costs of saving, more especially when you consider your total cost over the life of the mortgage.

Then, when you're ready, read Investopedia's tutorial How to Buy Your First Home. And be aware that there are sometimes special breaks for first-time homebuyers (see Credits for First-Time Homebuyers).

Article by Investopedia.com
Courtesy of First Choice Title Services & Escrow, Inc.

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