Before you start preparing to save for your dream home, it is first important to understand the costs that are associated with home buying. In addition to placing a down payment, homebuyers must also be prepared for closing costs, property taxes, and home repairs and maintenance. A great place to start in calculating the cost of these items is figuring out how much home you can afford. This will also allow you to estimate how much you will need to save for a down payment, since it is determined by the purchase price of the home. The type of loan you are seeking to secure will also determine how much money you need to put down initially. Once you have an idea of how much you will need to save, you can then follow some of the tips below to start building savings for your future home.
The first step in saving is to create a budget that allows you to keep track of your expenses and place any extra monthly income aside for saving. To build your budget, first determine the amount of income that enters your household each month. Next, add up all necessary expenses such as rent, loan payments, food, gas, and utilities. Then, estimate how much you spend on nonessential items, such as entertainment and restaurants. Subtract your total monthly expenses from your total monthly income to determine how much is left to place towards emergency funds and savings accounts. Once you can see the resulting number, look at each category of expenses to determine if there are any areas you can cut back on. For example, lowering the amount of money that you spend on entertainment will allow more money to flow monthly into your savings for a house. If you find yourself having difficulty with keeping track of your spending habits, there are a variety of apps that assist in creating and keeping a budget. You may also want to consider using a financial advisor to help create and accomplish your savings goals.
Another way to accumulate money needed for your down payment is to consider downsizing, which Rocket Mortgage states as “the process of reducing your expenses and living below your means while you save.” When downsizing, you only spend money on essential items, and place all extra income into a savings account. You can also practice downsizing by considering moving into a smaller home, looking into a more affordable area, or selling belongings you no longer need or use.
Analyzing your current purchasing habits and reducing or cutting out the bad ones can help you divert money to your future down payment. For example, impulse buying can be lessened by cutting down on the amount of online purchases you make and in person shopping trips you take. You may also find that unsubscribing to marketing emails will keep those “can’t miss deals” out of sight and mind. You may also want to consider the amount of takeout you order per month, as frequently ordering food at restaurants may be putting a damper on your savings potential. Strive to cook a few meals at home each week, and save the takeout for special occasions. Finally, if you are a fan of entertainment, chances are you have realized that having multiple subscriptions to streaming services can add up quickly each month. Consider cutting your subscriptions down to one or two platforms, to save more than a couple of bucks monthly.
While a relaxing break may be hard to pass up on, skipping a vacation can significantly boost your savings. In fact, the average family of four spends an estimated $4,500 on vacation– which is a large amount of money that could be placed towards a down payment. You don’t have to skip out on the fun, entirely though! Plan a staycation in your local area by visiting historical sites, exploring state parks, or visiting a new business or restaurant in your town. You will find yourself still making memories while having peace of mind that your money is being put to good use.
While the thought of paying off your debt while trying to save for a home may sound counterintuitive, it is actually a great idea when seeking a home loan. Lenders consider your debt-to-income ratio when determining whether you are suited for a mortgage. If you have a significant amount of debt, you are less likely to be approved for a loan; if you do become approved, you will likely have a higher interest rate and a higher down payment requirement. For these reasons, it is a good idea to work on reducing your debt before applying for a mortgage. Incorporating this into your budget is a great way to work towards those debt payment and savings goals.
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