How to start saving and when to buy your first own house

Buying your own house is a milestone for most of us. Since buying a home is often the largest single purchase you ever make, it makes sense to start saving money for it. However, it has been discovered that many of us buying our first homes underestimate the amount of cash we would need to acquire our dream home. Saving for a new house can seem like an impossible challenge, especially for first-time buyers.  But what kind of stats indeed come into play? 

We look at down payments, mortgage insurance, closing costs, and more. Singles, couples, families, at some point, practically everyone turns their financial focus to buying a property.  But how much do they need to save the first time out?  How much is enough to cover the typically steep slope of down payments and closing costs? When it comes to saving for a home, there are several helpful rules of thumb. But again, there are also possibilities for purchasers who need a leg up.  Let’s look at the essentials, and possible solutions, evaluating options that first-time purchasers might take to going through the front door of their first house.

Buying Your New Home: Savings and Expectations

Most real estate professionals would tell you to have at least 5 percent of the cost of a house on hand in savings to account for the down payment. But that’s merely a minimum, and expectations can range by the group. For example, in a place like New York, minimum down payments are nearly always 20 percent, no less.  And even if you’re able to acquire a mortgage by putting down less than 20 percent of the selling price, you’re virtually probably triggering required mortgage insurance as a consequence. 

Mortgage insurance, however, doesn’t have to be a huge stumbling block. Anyone wants to buy a property nowadays; there are two key focuses: accumulating the deposit and getting mortgage-ready. Here are some practical tips to help you achieve both.

Give yourself a reasonable time frame

Getting your time frame correctly is vital. You could wind up frustrated and disappointed if you push yourself, but a time frame that is too long can start to appear abstract and impossible, too. Take stock of any current savings or assets, look at the type of property you would expect to be able to buy – again, being realistic is a good idea here – and calculate out how much you will need to save for the level of deposit that you desire, usually 10 percent.

Then, please take a look at your budget and work out how long it’s going to take you. You might wish to play out a few scenarios, especially if you’re anticipating a pay boost or if you want to evaluate how plans like holidays or other significant purchases would affect your progress.

With saving, set habits early

Even if you’re relatively early in your career and potentially earning a lower wage as you gain experience, there are things that you can do to maximize your prospects of house ownership in the not-too-distant future. Even if you don’t have a lot of additional cash to save, putting saving habits in place will stand you in excellent stead for when you can save more. Because the habit is now in place, all you need to do is increase the amount when you can, and you’ll quickly develop a decent savings pot. 

Mortgage lenders also prefer to see consistent, well-establishing saving habits, as it shows them that you’re cautious about your money. Save in the proper position to speed up your progress. As you may be aware, interest rates on savings are usually terrible right now, and there’s little evidence that they will change in any substantial way any time soon. 

The difference between some of the highest interest-paying savings accounts and the lowest is relatively negligible, so it’s not worth discussing which one you choose. Still, there are other ways to grow your money into a reasonable house deposit.

Accountability is crucial

With primary, longer-term goals like accumulating the tens of thousands of pounds you will often need for your deposit, it can be easy to lose focus or enthusiasm when things don’t seem to happen quickly. Try to establish techniques to hold yourself accountable and stay connected with your objective of homeownership. Buying your first house is thrilling, and it should be something you enjoy and appreciate – not least because of all of the hard work you’ll have put in by the time you pick up your keys. Just keep your eyes on the prize, and you’ll get there.

How to Save money for your first house

You may be wondering, “but how do I save for a house?” Until there’s a money tree, the tried-and-true methods of saving your money are frequently the most effective ones.

Save First, Then Spend

Instead of spending your money and keeping what’s leftover for your home, start by earmarking a percentage of your earnings for your future home payments – and store them in a separate savings account. Consider automating your savings to withdraw your home money from your paycheck as soon as it’s deposited. There’s An App for That.

We’ve gotten used to tracking everything from our daily walks to our sleep – so why not keep track of your money? “A wonderful place to start with minimizing your expenses is knowing what they are,” adds Runzer.  “There are a lot of budgeting apps out there that you can use to track your expenditures each month. This is helpful since it raises awareness of where your money is going right now. From there, you can make judgments about what spending to keep and what to cut back on, based on your priorities and where you want your money to be going.”

Sometimes, even modest changes – like making coffee at home instead of going to coffee shops, dining out less frequently, or cutting off alcohol for a month – can significantly influence your expenses over time.

Add a Side Hustle

Side hustles like bartending, driving for rideshare or meal delivery companies, dog walking, or flipping vintage goods online can provide an extra influx of cash that helps bring you closer to your objective.

Make Temporary Cuts

When you’re saving for a home, it’s okay to make temporary cuts to your budget that help you save money, even if those cuts aren’t sustainable in the long term. If you join an expensive, $80+/month gym, freeze your gym membership for a few months to allow your funds to grow. Pause 401k contributions – financial guru Dave Ramsey advocates for up to two years.  While this isn’t something, you want to make a habit of, skipping a few months can help you reach the down payment and end renting sooner.

Cut down on your subscription services

You may need Netflix to unwind after work, but you may skip having Netflix, Hulu, Disney+, Youtube Premium, and HBO while you save up.

Save for: Closing Costs

U.S. house closing costs average $4,876, according to real estate analytics firm ClosingCorp. Generally, closing fees range between 2 percent to 5 percent of the home’s value. But what are closing costs? 

This includes:

  • Home appraisal
  • Origination cost
  • Title insurance
  • Escrow fees
  • Prepaid taxes and insurance

When you save money to buy a home, you’ll need to save money to cover all the closing expenses that allow you to own the home. You can typically get a reasonable approximation of your closing expenses by talking to your realtor – the price can vary depending on the size of your property and where you reside (home appraisals cost more in Baltimore, MD than in Philadelphia, PA, for example) (home appraisals cost more in Baltimore, MD than in Philadelphia, PA, for example).

Save for: The Down Payment

Most people have heard that it’s a good idea to pay at least 20 percent of your home’s value as a down payment. This helps keep your interest rate low and enables you to avoid paying an additional premium for private mortgage insurance (PMI) (PMI). Many large lenders also want 20 percent down. What happens if you don’t have enough money to do 20 percent? 

Luckily, various house loan programs, especially for first-time homebuyers, can help you secure loans with as low as 5 percent down. “It’s usually great to put down 20 percent, since the more you put down, the less you pay each month, and the less you pay in interest over the life of the loan,” explains Runzer. “However, sometimes 20 percent is a lot to save, and you may be ready to purchase a home and stop spending money on rent sooner rather than later. 

It’s entirely okay to put down less than 20 percent too. It depends on your scenario. Do you have the funds on hand? How much of a monthly payment can you afford? What’s your time frame, and how quickly do you want to acquire a home? How does the purchase of a home influence any other financial goals you’re working on? It’s crucial to evaluate all the numerous moving components of your money, what’s important to you, and make a decision that works for you.”

Waiting Comes with a Price

Another item to consider: rising costs and potentially higher interest rates may eliminate some of your savings, so it doesn’t always make sense to wait. For example, Philadelphia property prices have gone up 5.4 percent over the past year, as of Sept. 2020. Let’s say a couple began saving in Sept. 2019 for a $400,000 down payment – that’s $80,000 at an average 20 percent payment. However, because of growing prices, that comparable home is now worth $421,600. And if they wait another year and housing values grow gradually, the house will be valued at $444,400. 

By waiting too long, they may risk getting priced out of their desired house. According to a recent Bankrate survey, millennials (who now make the majority of first-time homebuyers) need three years on average to save for the down payment for their home.

Save for: After Closing

Once you receive the keys to your new house, there may be additional expenditures you need to think about. “Don’t forget to think about any expenses that may come up while you move and settle into the new house,” recommends Runzer. 

“Are you paying for movers? Are you doing any work to the house? Do you need to acquire any furniture?” Buying a new couch is something you can leave off for six months, but paying for movers to transport your old sofa to your new residence will be an instant cost. You also may need to prepare for more significant utility expenditures if you’re moving from an apartment to a house. Make a list of probable post-home purchase costs that you need to save for, and budget accordingly.

Pay Down Existing Debts/Work on Your Credit Score

It may seem paradoxical to pay down your bills when you’re attempting to save for a home, but this is a vital step in making homeownership a reality. Lenders will limit your debt to income ratio, so the more debt you pay off, the less limited you’ll be when it comes to budgeting for your property. Paying down your debt will also enhance your credit score, which in turn enables you to obtain reduced interest rates. 

Lower interest rates can save you hundreds of dollars throughout your loan. “The number of debt payments you have relative to your salary determines how much of a mortgage you’ll be approved for,” explains Runzer. “If you can’t yet afford everything you desire, paying off certain bills will widen your budget and lighten the weight each month.”

How to Save for a House: Start Planning Now

Ultimately, the best way to start saving for a house is to prepare now rather than later. The sooner you figure out how much you need to save and begin budgeting, the closer you are to receiving the keys to your new house. “Buying a house might feel quite overwhelming and a little intimidating. For many of us, it’s the most significant purchase we’ll ever make,” observes Runzer. “So it is essential to be intelligent and mindful. However, it’s also something that is within your reach and that you can do! It’s not as scary as it may appear, and you don’t have to do it alone.”

Start early

Investing early in your career is crucial to acquire the desired corpus within a reasonable period. It’ll help you plan home purchases at an early age. If you apply for a home loan in the 20s or early 30s, banks can grant you a loan tenure of up to 30 years. Hence it will lessen your immediate EMI load. Also, the force of compounding return will receive more time to work on your investment, and you can create a corpus very quickly without taking excessive risk.

Invest for your future EMIs

Apart from saving for the down payment, it would help if you stayed ready to pay the EMIs once you purchase the home. Banks are nowadays charging an interest of roughly 8.3 to 8.5 percent p.a. If you put money in a mutual fund for a long duration, it can quickly provide you with a return of more than 10 percent (beware of risk; return is subject to the market situation) (beware of risk; return is subject to market condition). 

So, you should obtain a loan of a longer length to keep the EMI lower than your exact repayment capacity and invest the additional amount to get a more significant return. Use such corpus that you establish by paying an extra amount to return the loan earlier than its actual tenure.

Home Affordability

If you’re beginning your homebuying journey, a fantastic place to start is figuring out how much house you can afford. Once you take this into mind, you’ll be able to get a fair approximation of what your down payment could be.

Build A Better Budget

The first stage in the saving process is budgeting. If you don’t know where your money goes every month, it’s impossible to divert money to your down payment. First, sit down with your bank statements and all your credit card payments. Look at where you’re spending the most money. Note how much you spend on necessities like rent, student loan payments and utilities. Then assess how much you spend each month on nonessentials like entertainment, restaurants, etc. A budgeting tool can help you automate this process if you want to avoid calculating your spending yourself.

After you categorize your spending, search for areas where you may cut back. Set a specific (but realistic) budget for each category and stick to it. Make sure you budget a specific dollar amount to put away for your down payment each month. Consider your savings a non-optional expense.

Ask For A Raise

Do you have little money left over to save when you are paid? It might be time to ask for a raise. Use these tips to boost your likelihood of success.

  • The time is right: Timing your salary conversation is the best way to set yourself up for success. Avoid asking your manager for a meeting during a stressful project or when time is at a premium. The optimum time to ask for a raise is at your yearly performance review – but the weeks after completing a significant project is also a fantastic opportunity.
  • Come prepared: Never walk into a pay talk unprepared. Gather detailed performance data and results from the projects you’ve worked on. The layout just how busy you’ve been and what you’ve been working on. It’ll assist show your management that they can’t afford to lose you.
  • Be confident but grateful: Your demeanour during your pay discussion meeting is just as crucial as what you say. Be confident in what you’re asking but also appreciative and excited.

Let your manager know that you envision yourself expanding with your organization and that you’re excited to take on more tasks.

Skip Vacation

Exploring a new destination can be a great experience. Unfortunately, it’s also often a pricey one. The average family of four spends roughly $4,500 on vacation — that’s a hefty chunk of dough. Consider preserving that money for a down payment and take a staycation in your city instead.

Chop Down Your Debt

Focusing your additional money toward your debt could seem contradictory if you’re on a mission to buy a home. However, one of the first things lenders look for when assessing you as a mortgage candidate is your debt-to-income ratio (DTI) (DTI). The more debt you have, the less favourable you are as a candidate. This can mean that you’ll pay more in interest and have a more significant down payment required. Take some time to lower your debt before you apply for a mortgage loan. 

Look at exactly how much you owe on your credit cards, student loans, personal loans and vehicle loans, and establish a plan to tackle it.

Rent Out Your Spare Room Or Parking Space

Do you have an additional bedroom in your apartment? If you do, consider listing it on an internet hospitality platform like Airbnb. With Airbnb, you get to control who uses your space and when. You can approve dates and guests ahead of time and only rent out your spare room when it’s convenient. You can also block off dates when your rental isn’t available if you have a friend or family member coming for a visit. If you live in an urban area where parking is at a premium, consider renting out any designated parking with an app like JustPark. 

JustPark allows you to hire out your parking space much like you’d rent out your spare room on Airbnb. If you reside in an intensely crowded location, this might be a fantastic source of extra cash on the weekends.

Automate Your Savings

If you’re the type of person who’s prone to impulse spending, you may want to consider automating your savings. Here’s how it works: 

First, establish how much you want to save per month for your down payment. Contact your bank and request an automated withdrawal from your primary account into a separate savings account. Your bank will automatically take money out of your monthly account and place it into a separate report. This can be handy for folks who have problems managing their money.  When you make your money less accessible, you may be less tempted to buy goods you don’t need. Just remember to plan your withdrawal on your payday or when you know you’ll have enough money. Overdraft fees can put a massive dent in your down payment budget.

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