Mission Possible: Saving for a Down Payment
Saving for a down payment on a home can seem like an impossible journey. And truth be told, unless you make it a priority, it just might be. But here are 8 creative ways that you can accelerate your savings to make homeownership a reality faster than you thought possible.
1. Create a special savings account for your down payment – When you combine your down payment savings with your normal savings, they will oftentimes get used for things other than your down payment.
Start by setting up a dedicated savings account that will only be used for the down payment on your home. This will also make it much easier to track and keep you motivated as you watch it grow.
2. Direct all ‘non-normal’ income to your down payment savings account – Most people adjust their living expenses around their monthly income. This means when you receive unexpected income, such as a tax refund, work bonuses, or even a stimulus check, you’ll have a decision to make…save it or spend it?
If you’re serious about purchasing a home, you’ll need to stay disciplined and direct these ‘non-normal’ income amounts into your down payment savings account instead of that trip to Cabo.
3. Pay down high-interest credit cards immediately – Carrying a balance on high-interest credit cards might be the single biggest barrier to building up your savings.
Let’s assume you have a $10,000 credit card balance with a 25% APR. If you make monthly payments of $250 (without making any additional charges), it would take you 7 years and 4 months to pay off the entire balance. Your entire amount paid would be $21,720.
If you were able to pay an extra $100 per month ($350 per month total), it would be paid off in just 3 years 9 months and your entire amount paid would be $15,347.
If you continued making $350 payments each month into your down payment savings account after you paid off your balance, you would have $15,050 in that account by the time you reached the 7 years 4 month mark that you would have needed to pay your balance down to $0 by only paying $250 per month.
PRO TIP: Once you pay your credit card balances down to $0, start making similar monthly payments into your down payment savings account. You won’t feel the difference in your monthly budget, but your down payment savings account will be fat and happy in no time.
4. Start a side hustle – Are you a great cook? Do you love making crafts? Are you a natural handyman? Why not find a way to monetize these hobbies with a side hustle? You can use Facebook groups, Etsy, Craigslist, or just good ‘ole word-of-mouth to launch these businesses with no money.
As you start to generate income, make sure you route it into your down payment savings account.
Of course, if you don’t have any secret hobbies, you can always drive a few hours each week for Uber, Lyft, Doordash, or Instacart. Just 5-10 hours per week will quickly add up to thousands in your down payment savings account.
5. Find the right loan program – Saving 20% for a down payment on your first home in Southern California is difficult for most people.
Fortunately, not all mortgage loans require a 20% down payment. FHA loans require as little as a 3.5% down payment (this would mean just $21,000 on a $600,000 home) and even come with some relaxed credit score requirements.
While FHA loans require private mortgage insurance (PMI), which will add a couple hundred dollars per month to your mortgage payment, it can help fast-track your ability to become a homeowner. And oftentimes the financial benefits of homeownership, such as property tax and mortgage interest write-offs, and leveraged equity will far outweigh the additional PMI costs.
BONUS: Talking to a mortgage lender early on can help you identify things you can do to improve your credit score and which loan program will be best for you. In turn, these can reduce your rate significantly, and help you qualify sooner. Answer these 6 questions and we can get you pre-qualified for a loan amount and help you start planning now.
6. Invest your savings while you save – Earlier in the article, we suggested setting up a special down payment savings account. Rather than simply leaving this in a bank account that accrues almost no interest, consider putting it into an investment account(s) that has a higher rate of return.
You can use apps like Chime or Acorns to make this quite easy. Remember that saving to buy a home is still your primary goal, so don’t get too aggressive with your investments, but don’t settle for little-to-no interest either.
7. Set up automatic savings deposits – When you have to actively put money into your savings account, it forces you to make a choice every time. Setting up automatic transfers or deposits into your down payment savings account each week or month will eliminate the need to test your willpower.
Savings apps like Digit or Qapital can help you save by rounding up transactions into your savings account. Finding as many ways as possible to automate your contributions to your down payment savings account will help you reach your goals faster.
8. Borrow from your retirement plan – [insert obligatory disclaimer here about talking to your financial advisor on this one] but if you have a 401(k) or IRA retirement account, you can borrow money from this to purchase a home. Be advised that there are some drawbacks to this, but with the right planning, it can be a secret weapon.
So there you have it. Eight simple ways to turn the impossible (saving for a down payment) into a manageable accomplishment. Whether you choose to employ one of these or all eight, be sure to enjoy the journey and celebrate your progress. It won’t always be easy, but in the end, it will be worth it.
The Wright Team is a team with 30+ professional real estate agents and more than 500 years of combined experience. We are the top-selling team at the #1 selling single-office in all of Orange County. We would love the opportunity to help you find your next dream home. Whether you’re 5 days away from buying, 5 months away from buying, or 5 years away from buying, it’s never too early to start planning with a real estate professional.
If you’d like to set up a 60-minute Buyer’s Consultation so we can show you all the things we do to help our buyers stand out, click this link, or text us at 949.395.8559 to set it up today.