How To Save For A Down Payment On A House

Nationwide home buying statistics for 2020 are not going to look like the rest of the century, because of the economic disruptions caused by Covid-19, but in 2019 the average median down payment for first-time homebuyers was 6 percent of the purchase price. 

Likewise, in 2019 the average cost of a brand new home in America was just slightly less than $300,000, which in the times of 20 percent down payments meant buyers would need $60,000 in cash to put down with their lender in order to secure their chosen mortgage terms.

For those who see $60,000 as an impossibly high sum, keep in mind that lenders will charge their clients a monthly private mortgage insurance fee when borrowers put down less than 20 percent on a mortgage loan. This can translate to an extra monthly charge for most people making an average down payment of 6-12 percent.

So how can you beat this system? Is it better to save 20 percent for a down payment or is it more convenient to pay less up front and deal with the added costs as you go? 

Step 1 : Setting Goals

The first thing you want to do when saving for a down payment is create a budget, listing expenses and incomes together to determine the range of what you can afford. The price of the home itself is not the final determiner of the budget, even though it plays a major role. In addition, there are extra charges in buying a home, like closing costs, maintenance, repair and moving charges.

Learn budgeting basics here.

Once you know your budget, there are three questions to ask yourself in order to set limits. 

• How much should I save for a down payment on a house?
• How long will it take to accomplish this savings goal?
• Where will I put this money as I save it?

Let’s keep going, but remember these questions, because they will come back to us in a later step.

Step 2: Cut Small to Save

So how is this money going to get saved? Are you just shuffling amounts between accounts or have you taken some steps to rein in your expenses and examine where savings can be accomplished?

Saving money means you have cut spending. Cutting spending means you have made deliberate choices. And deliberate choices can be small or large.

For example, some small monthly expenses, when taken together, can add up to a sizable portion of your paycheck. 

• Gym $60-$90 per month.
• Dining out regularly $200 per month.
• New clothing purchases $100 per month.
• Cable TV bundling $110 per month.
• Name brand vs. generic grocery items $160 per month.

These things are all nice to have, and some would say modern life is less active and relevant without them, but small monthly expenses add up, and by saving them in a dedicated account instead of spending, homebuyers can watch their down payment savings quickly expand and deepen.

Step 3: Cut Big to Save

The small things add up, and in six months the amount will be noticeable and maybe even a little bit inspiring. But what about the big-ticket items? To get to a 20 percent down payment, why not look into the very basics of your financial existence? 

• Car Insurance: Compare rates and shop around for lower premiums.
• Online Sales: Use internet and social media markets to sell your car, your couch and your old laptop online.
• Refinance student loans or auto loans to a lower rate while you focus on saving.
• Delay your vacation. 
• Save your annual bonus/raise.
• Retirement Savings Pause: The unspoken rule of thumb is to save 15 percent of your monthly income and put it towards retirement. Nobody is saying your retirement plans aren’t important, but for right now the down payment should be your priority. 

What is the impact of saving even more for a down payment? See Empeople’s online Compounding Interest Calculator to find out your savings potential.

Step 4: Get a Side Gig

You work for a living and your salary pays the way for you to continue living. It should be enough. But if you are trying to save a down payment for a house and you have a two-year plan to gather a 20 percent down payment on a $300,000 mortgage, then maybe it’s worth taking a look at a second job.

Not a second career. Nothing to match the 40 hours a week you already spend at work. No, a side gig is something that you can do in your spare time, with the tools and talents you already possess, in order to accumulate cash to help you achieve your goal.

The side gig economy is more robust and diverse than you might imagine.  Here are a couple ideas: 

• Driving – Internet companies pay drivers to carry passengers and deliver products, try Uber, Lyft and DoorDash for examples of extra-earning opportunities.
• Teaching – Cheap technology and plenty of experienced computer users make the online education market a great place to earn extra money tutoring in subjects you know.
• Walking – Dog walking, lawn mowing, snow shoveling. These are all money-making opportunities open to those willing to walk over and do them. 

A side gig is an important and resourceful way to save more money, but a realistic goal here should be around $100-$150 a week in additional income, and not much more. Not because it’s not possible, but rather because 10 hours a week spent is likely as much free time as a busy homebuyer can spare.

Use Empeople’s online Goal Savings Calculator to figure out how much you can save and how long it will take.

Step 5: Automate and Maximize Savings

When you commit yourself to getting a home mortgage, the first question you should ask yourself is: Can I save enough to make a 20 percent down payment on my first house? Or should I just try and get a mortgage as a first-time homebuyer that lets me pay less upfront?

However you answered, Empeople has strong savings tools to build your finances.

If your savings goal has a two-year duration, a length of time in the financial world best described as ‘short term’, that means you have just two years to keep your money in a profit-earning, interest-bearing savings account at Empeople.

Empeople offers four kinds of savings accounts:

• Money Market – No balance requirement, tiered dividends, no fee to access money.
• High Yield – Higher deposits, tiered dividends, no access fee, unlimited withdrawals.
• Health Savings – For those covered by high deductible health plans, earns dividends.
• Certificate – Minimum deposit requirements, early withdrawal fees, compound dividends.

You can read more about the different savings accounts at Empeople here.

Whether you are a first-time homebuyer in search of a mortgage or a long-time homeowner looking to refinance and renovate, Empeople has options and solutions for you. Our credit union has no outside shareholders, and members are also owners. Because we are a member-owned institution, we are able to pay higher returns on deposits, charge lower rates on loans and even offer members a unique opportunity to share in the financial success of their credit union.