How to Overcome the Challenges of Saving for a Down Payment for Your Home
One of the biggest challenges to buying a home of your own is saving enough for a down payment. Though in some instances it is possible to buy a house with little or zero down payment, nowadays it’s not as common as 8-10 years ago. Plus, your financial advisor will tell you that it is always better to place a down payment of at least 20 percent your buying amount since this will help you obtain the best possible interest rates and you will no longer have to worry about buying Private Mortgage Insurance (PMI).
But this means that you need to come up with at least $50,000 if you are planning to buy a home worth $250,000. How does one go about saving thousands of dollars in today’s fluctuating economic conditions? Read on for the best tips for overcoming the challenges of saving for a down payment for your home.
Plan, plan, plan
It’s never too early to invest in your own home. Establish a timeline for yourself and set aside a fixed portion of your monthly salary as savings for your down payment. Give your bank a standing instruction to transfer this amount from a checking account to a high-yield savings account earmarked for this purpose on the fifth of every month. This will reduce your chances of spending this money elsewhere. And don’t forget to shop around for the best bank with the highest interest rates.
Did you know that a first-time buyer can withdraw up to $10,000 from his individual retirement account without paying a penalty fee for early withdrawal? Find out if you are eligible for this, but then be aware that you will still have to pay income tax on the amount that you have withdrawn.
Track your expenses
Note down each and every expense you make using an online expense tracker for maximum ease and clarity. This will help you understand how much you have been spending monthly on various categories such as food, housing, travel, entertainment and on other miscellaneous items.
If you are spending most of your income on rent, you can consider taking on a roommate, moving in with family or moving into a smaller and cheaper apartment. This might save you hundreds of dollars every month. Or use your reputation as an ideal tenant to get your landlord to reduce the rent. Most landlords are aware that it is hard to find a reliable tenant who makes his payments on time and maintains the property in a good condition.
If travel is taking up a considerable portion of your monthly take-home pay, start car-pooling or use public transportation. Restaurant bills eating up your savings? Brush up your cooking skills and minimize eating out. Shop wisely, make use of coupons at the grocery store and try buying staples in bulk at lower rates.
Cut down on all non-essential spending, such as gourmet coffee, branded clothes, expensive gym memberships and so on. Avoid shopping online and minimize the use of credit cards.
Re-evaluate your cell phone and internet plans if you had subscribed to them a long time ago. Your provider may have come up with new plans or your needs may have changed, enabling you to switch to a less expensive plan. Check your cable package. Are you unnecessarily paying for extra channels than you never watch?
Though these tips may sound harsh, remember that many of these moves are temporary to speed the process of getting you into a home you will love and enjoy for many years to come.
Involve your family
If you are married with children, you cannot cut down on expenses without involving your entire family in that decision. Talk with them openly, discuss the reasons behind your decision and enlist their support.
Choose the right financial advisor
Get hold of the right financial advisor who can evaluate your financial situation and tell you how to boost your savings and reduce your debt. Find out if you can minimize your credit debt by shifting all other balances to a low-interest credit card.
Find alternate sources of income?
It’s not that you cannot buy a house only with one income; multiple sources of income will help you achieve your goal much faster. Work overtime if company is ready to pay you for the extra hours that you put in. Take on a part-time job, or if your profession allows, try freelancing to earn some extra money that can be set aside entirely towards your down payment. You can even earn money running errands for others. The work might be unglamorous and even stressful at times, but the end result is going to be worth it!
You can also try convert a skill that you already have or a hobby into a source of income so that you do not lose interest. For example, you can try working part-time at your local library if you are interested in books. Or if you’ve always been an organized person, you can consider expanding it into a part-time job as a virtual assistant.
Liquidate your belongings
A garage sale may not make a substantial contribution to your down payment savings, but every single penny counts in the long run! Go through your belongings with a critical eye and make a list of all things that you do not necessarily need but which are in good condition and can help you net some much-needed extra cash.
Don’t forget to check out online marketplaces such as Craigslist and eBay which can help you strike good deals for your belongings. The luxury handbag which you bought out of sheer curiosity and the ornate lampshade that someone gifted you five years ago might find some willing buyers online.
Saving money for a down payment is a long drawn-out, challenging process, but not impossible. With smart spending and proper financial planning, you can cut down on expenditures, improve your savings and come up with a sizable down payment without throwing your lifestyle in the dump. And before you know it, you’ll be walking in through the front door of your own home!
Kurt Jacobson is a surfing enthusiast with a background in real estate. Having moved 10 times in the past 7 years, he thrives on helping others learn from his experiences. When he’s not out shredding waves he writes about houses for rent in Norman OK.