One of the biggest purchases most Americans make is buying a home. It’s a huge milestone for many people, after clearing that most dreaded hurdle: saving enough for the downpayment.
But the need for healthy savings doesn’t stop there. Cash reserves are also needed for closing costs as well as property taxes, repairs and other expenses unique to homeownership.
Building your cash reserve can be challenging, especially if your budget is already tight. But some planning and a little discipline can deliver real results.
6 ways to build savings for buying a home
1. Calculate how much you need
The average downpayment currently stands at 6% of the loan’s value - a far cry from the standard 20%. In fact, many banks offer conventional mortgages with downpayments as low as 3%.
Government-backed loans, like FHA loans, allow downpayments starting at 3.5%, while some VA and USDA loans require no down payment at all.
Depending on the loan type, with a downpayment below 20%, you might have to pay for mortgage insurance – and the trade off might not be worth it, if the insurance significantly boosts your monthly mortgage payments.
Before you start looking for a mortgage, talk to a loan officer to determine what type of loan you might qualify for. They can advise about your down payment and other requirements.
2. Don’t carry too much debt
Carrying too much debt can make it harder to save for a house, as it can increase the amount you’re paying in interest. That’s cash that could go toward your downpayment instead.
Try paying off the balance on your card or use a balance transfer to a lower interest rate credit card.
If you have student loans, refinancing could help lower your interest rate, which is more money you could re-direct to your savings. payments.
Too much debt can make it harder to qualify for a mortgage. Do what it takes to reduce your debt load now, and you’ll qualify for lower monthly house payments for years ahead.
3. Temporarily pause your retirement savings
Saving for retirement should always be a priority. But if you’re young, a temporary pause can redirect funds to your downpayment savings, where the equity you’ll build from owning a home can add significantly to your retirement.
You could save for a house faster, then resume contributions to IRAs or your 401(k) as soon as you’ve saved enough.
4. Automate your savings
Taking a chunk out of your paycheck yourself every month can be painful and easy to let slip. Automated savings can make sure you stay on track.
Targeted savings funds can help too, with separate funds set up for each of your financial goals. It’s a tool that can help track your progress and organize priorities, especially when savings have to be split between a downpayment on house, a much-needed vacation and the big splurge you’ve been waiting for.
5. Take on part-time work
Second jobs are more common than you might think, even among high-income Americans. High-earning Americans — bringing home more than $100,000 a year — “receive approximately a fourth of their total earnings from their second jobs,” according to the US Census.
The 2021 Census report suggests these aren’t a “minor one-off source of earnings, such as working part-time one or two weekends a year, but rather a persistent additional job.” While the report argues for more research, we can say this much: even among highly paid professionals, more than one source of income is common.
For the rest of us, look for ways to boost your income with a second job or a side gig. Try extending the skills you use in your primary job. Or pick up work that takes you out of your daily grind, from ride-share driving to pet sitting to even charging self-service scooters.
It’s a good time to job hunt, with the unemployment rate low and wages going up. The point is: extra income can build your savings faster and keep your homeownership plans on track.
6. Postpone your summer vacation
Getting away for a vacation can be an amazing experience, but it can also be expensive. While some of us never get more than a night or two off, those who can afford a vacation spend, on average, around $4,500 on a trip.
That number is likely to get even higher this year, with inflation hitting travel costs hard.
Consider postponing your summer trip and instead pocket that money in your downpayment savings.
