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How to Save for a Down Payment on a House

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If you want to buy a home, you need to determine how to save for a down payment. Most lenders require at least some money for a down payment. But how do you get started saving so much money to buy a home? These tips on how to save for a down payment will help.

How to save for a down payment

Whether you're in need of a first-time home buyers guide or have ample experience in the real estate market, saving for a down payment can be a challenge. Here are seven steps you can take to ensure you have the necessary funds to purchase your home.

Step 1: Set your savings goal

You can't start saving for a down payment until you know how much money you'll actually need to put down on a home. Many different factors affect that including:

  • The purchase price: If you buy a property that costs more, you'll need a larger down payment since the amount you must put down is usually calculated as a percentage of your loan value. For example, if you buy a $100,000 home and put 20% down, you would need a $20,000 down payment, but if you buy a $200,000 home and put 20% down, you would need $40,000.
  • Lender requirements: Lender rules for minimum down payments differ, but some lenders allow you to put down as little as 0% to 3% while others mandate a minimum of 20% down or more. The best lenders for first-time home buyers are often more willing to accept a lower down payment.
  • Mortgage insurance: Mortgage insurance protects the lender from losses in foreclosure if you put down a small down payment, but you must pay for it and it adds to your monthly costs. Our mortgage insurance guide explains more about how this insurance works.
  • When you plan to purchase your home. Your timeline for buying will allow you to calculate the necessary amount to save each month.

Step 2: Include closing costs in your calculations

You need to save not only for a down payment but also for any closing costs your lender might charge. These must be paid up front when you close on your loan. They can add up to 2% to 5% of your home's value.

Some mortgage lenders allow you to roll closing costs into your loan. But this means you're borrowing even more money. As a result, it can be harder to get approved for a mortgage if you choose to roll closing costs into your loan. This can also make your closing costs more expensive over time since you'll pay interest on them.

Step 3: Determine what account should hold your down payment

It takes time to save up for a down payment. To meet your savings goal, you need to keep the money in a safe place until you're ready to buy. You don't want to risk investing in the stock market and losing the money. This is especially true if you'll be buying a home soon.

A high-yield savings account is often the best place to put your down payment. These accounts let you access your savings when you need it and offer a higher interest rate than a traditional checking or savings account. There's also no risk of losing your savings so long as your bank is FDIC insured.

You can also explore other risk-free investments, such as certificates of deposit (also known as "CDs"). If you've never heard of CDs, check out our guide: What Is a CD?

If you decide to invest in a CD, shop around for the best CD rates to see how they compare to the interest paid by a high-yield savings account. However, be aware that CDs have strict withdrawal requirements. You may not be able to access your money immediately when you need it, unless you pay a penalty.

Step 4: Set a deadline for achieving your goal

Determining when you plan to purchase your home helps you decide how much to save each month to end up with your necessary down payment. For example:

  • If you want to become a homeowner in two years and need a $50,000 down payment, you would have to save $1,923.08 per month
  • If you want to become a homeowner in five years and need a $50,000 down payment, you would have to save $833.33 per month.

Step 5: Prioritize saving in your monthly budget

After you know how much you must save each month based on your timeline and down payment amount, create a budget that treats this amount as a must-pay bill.

If you must invest $833.33 per month to buy a home in five years, work that amount into your budget. This could mean cutting discretionary spending to free up enough cash to meet your savings goal.

Step 6: Set up automatic contributions to your account

Once you've found room in your budget for saving, automate the process. Have your desired sum automatically withdrawn from your bank account on payday. Arrange to have it directly deposited into your down payment account instead of into your checking account where you might be more likely to spend it.

RELATED: Check out The Ascent's Qapital Review. Qapital helps people save with savings automation for a variety of activities.

Step 7: Keep track of your progress

Monitor how your down payment fund is growing. Make sure you're staying on target with your monthly contributions.

This helps you stay motivated as you watch your money grow. It can also help you change course if you aren't saving enough. If you see too little progress, you may decide to make other spending cuts. Or you may consider picking up a side gig and saving the extra income.

Still have questions?

Here are some other questions we've answered:

FAQs

  • To save for a down payment on a house, take these seven steps:

    1. Determine the amount you need to save
    2. Factor in closing costs
    3. Decide where to keep your down payment account
    4. Set a timeline for saving
    5. Develop a budget that prioritizes savings
    6. Automate your account contributions
    7. Track your progress
  • Generally a high-yield savings account is the best place to put money you're saving for a down payment.

    A high-yield savings account offers a more competitive rate of return than traditional savings accounts or checking accounts. Your money remains accessible. If it's in an FDIC-insured account, there's no risk of losing it. And you're separating your savings from your checking account, where it's more likely to be spent.

    Other options exist. These include money market accounts, CDs, or bonds. Most have downsides, such as an inability to access your money exactly when you need it without incurring penalties.

  • The amount you'll need to save for a down payment depends upon:

    • How much you plan to spend on a home
    • Your lender's down payment requirements
    • The amount of equity interest you want in your home
    • Whether you hope to avoid mortgage insurance, which raises your monthly payment

    Traditionally, a would-be home buyer was required to put down 20% of a home's value. Now, it's possible to buy a home with just 3% down. Certain kinds of government-backed loans, such as VA loans, may even let you purchase with no down payment at all.

    Still, a larger down payment can lead to a wider choice of loan options. It can also help you reduce your monthly payment since you avoid private mortgage insurance. And it can reduce the chances you'll end up owing more than your home is worth. As a result, when possible, aim to put at least 20% down.

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