Approximately 52% of Americans plan to buy a home in the next five years, according to a report from the American Bankers Association, which leaves 1,825 days to save anywhere from a 3% to 20% down payment.
So, it’s important to start saving now, especially since for many borrowers, the down payment is the biggest obstacle of homeownership. The American Bankers Association Foundation highlighted six tips to help consumers cut costs and start saving.
- Develop a budget and timeline:
Start by determining how much you’ll need for a down payment. Create a budget and calculate how much you can realistically save each month – that will help you gauge when you’ll be ready to transition from renter to homeowner.
- Establish a separate savings account:
Set up a separate savings account exclusively for your down payment and make your monthly contributions automatic. By keeping this money separate, you’ll be less likely to tap into it when you’re tight on cash. If you received a tax refund, consider putting all or a portion into this account.
- Shop around to reduce major monthly expenses:
It’s a good idea to check rates for your car insurance, renter’s insurance, health insurance, cable, internet or cell phone plan. There may be deals or promotions available that allow you to save hundreds of dollars by adjusting your contracts.
- Monitor your spending:
With online banking, keeping an eye on your spending is easier than ever. Track where most of your discretionary income is going. Identify areas where you could cut back (e.g. nice meals out, vacations, etc.) and instead put that money into savings.
- Look into state and local home-buying programs:
Many states, counties and local governments operate programs for first-time homebuyers. Some programs offer housing discounts, while others provide down payment loans or grants.
- Celebrate savings milestones:
Saving enough for a down payment can be daunting. To avoid getting discouraged, break it up into smaller goals and reward yourself when you reach each one. If you need to save $30,000 total, consider treating yourself to a nice meal every $5,000 saved. This will help you stay motivated throughout the process.
“A down payment is often the largest single payment a consumer makes in their lifetime and saving for it isn’t easy,” said Corey Carlisle, executive director of the ABA Foundation. “However, with a few changes, consumers can put themselves on track to make their homeownership dream a reality.”
One of the top myths about down payments is that borrowers need to put 20% down. “Today, a 20% down payment is not required and depending on the buyer’s situation, it may not be optimal. Homeownership programs allow buyers to save on the down payment and retain savings for home maintenance and improvements. Today’s programs include grants, first mortgages with below-market interest rates and annual tax credits,” said Rob Chrane, CEO of Down Payment Resource.
Borrowers have more options now, with the growing popularity of the 3% down program many lenders now offer, along with zero down alternatives for those who qualify for VA and Rural Housing Development loans.