Though it's possible to buy a home with a down payment of under 20%, it's good to aim for that 20% target for a number of reasons. First, doing so will help you avoid private mortgage insurance, or PMI, which will only make your ongoing mortgage payments more expensive. Secondly, by putting down 20% of your home's price, you'll have an easier time building equity in that property.
Of course, coming up with a 20% down payment is easier said than done, especially when starter homes today can easily come with a price tag of $150,000 to $250,000 -- or more, depending on where you're shopping. But here are a few things you can do to scrounge up that cash and put yourself one step closer to owning a place of your own.
1. Follow a budget
Many people pay their bills every month without really understanding where their money goes. But if you're willing to set up a budget and then follow it, you'll have an easier time tracking your spending and carving out ways to boost your savings. For example, you might think you only spend $200 a month on restaurants and another $200 on leisure, but what if, upon creating your budget, you realize you typically spend more like $300 on each? That could set off a light bulb in your head to cut back in both categories and bank that savings for your down payment.
If you're intimidated by the notion of creating a budget, you should know that it's actually really easy. Open a spreadsheet, and list your monthly expenses. Then, comb through the past year's bank and credit card statements to see what each bill or spending category costs you on average. Finally, compare your total average spending to your earnings, and if there's not a lot of room left over to sock away money for a down payment on a home, make changes to free up more cash.
2. Move back in with your parents -- or someplace with free rent
If you've been living independently for quite some time, packing up and moving back in with your folks may not seem ideal. But when you think about the potential savings involved, it could be a move worth making.
Imagine you currently spend $1,000 a month on rent and another $250 a month on utilities and cable. If you were to move back in with your parents for a year and bank that $1,250 a month instead, you'd be $15,000 richer after 12 months. And that alone could position you to buy the home you want.
Of course, it could be the case that your parents have already downsized, or that they've simply gotten used to being empty-nesters and aren't looking for a change. If that's the case, talk to your siblings or friends about the possibility of bunking with them temporarily to give your savings a quick boost. You can return the favor by letting them live rent-free in your new home for a bit once you buy it.
3. Get a side hustle
Maybe living rent-free isn't an option, and maybe you really don't have a lot of wiggle room in your budget to cut back on spending. If that's the case, a second job could be your ticket to a down payment on a home. The money you earn from that second gig shouldn't, in theory, be earmarked for existing bills, so if you're able to earn $100 a week, and that becomes $75 a week after taxes, you're looking at $3,900 in down payment funds in the course of a single year.
Saving up to buy a home isn't easy, but the more money you have to put down, the less expensive your mortgage will be. Furthermore, applying for a mortgage with a sizable down payment in hand could help you get approved for a home loan, and that by itself is a good reason to push yourself to save.
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