The housing market is pretty intense right now. There aren’t many homes for sale, so prices are going up and buyers are often spending $20,000 to $30,000 more than the asking price. Because of this, it’s smart to try and save up a 20% down payment when you’re planning to buy a house.
Even though we don’t know how long these high prices will last, having cash ready is always a good thing. You don’t have to put down 20%, but it does give you an edge in bidding wars and can make your mortgage payments easier to handle. Saving that much money isn’t easy, so here are some tips to help you build up your savings.
First, set a realistic goal. Find out how much homes are going for in your area and what you can afford. In 2020, the average house price in the U.S. was $389,400, meaning a 20% down payment would be around $77,880. But there are plenty of places where you can get a nice average house for $250,000, where you’d need a $50,000 down payment.
Also, keep in mind that places with higher property prices often have higher salaries too. For example, someone might make more money in Seattle than in Indianapolis for the same job. If you’re serious about buying, make sure the costs are sustainable for you, including things like upkeep, repairs, insurance, and possible tax increases. Use online mortgage calculators to get an idea of your future monthly payments and plan your savings from there.
Next, cut your living costs as much as possible. If you want to save $50,000 in three years, you’ll need to save about $16,666 a year or $1,388 a month. One effective way to reach a big savings goal is to reduce your biggest expenses. You can choose what to cut back on, but it’s important to understand how your choices will affect your overall progress.
Try renting a smaller, cheaper place, setting a strict grocery budget and cooking at home, or driving an older car without a loan.
Lastly, be patient. Many people don’t like the idea of saving for something over a long period, but waiting can pay off. Saving for a 20% down payment over three years might seem tough, but it’s worth it.
Consider combining cost-cutting measures with ways to increase your income. You might also temporarily reduce contributions to other savings goals while you build up your down payment fund.
Borrowing from retirement accounts like a 401(k) or IRA is an option, but it comes with potential taxes, early withdrawal fees, and missed growth opportunities.
In conclusion, while a 20% down payment isn’t required, it offers many benefits. It can lower your monthly mortgage payments, eliminate private mortgage insurance (PMI), and give you a leg up in negotiations when buying your home.