Maybe you’d love to pay a monthly mortgage into something that’s yours and builds equity rather than paying rent for years. While homeownership sounds like an amazing dream, the reality is that you must come up with a down payment, have an emergency fund in place, and find something that fits in your budget (not to mention qualify for a mortgage with a lender).
But if you’re young, devoting all your funds to savings can take a toll on your social life. Cutting your budget to the bare bones isn’t feasible if it means losing ground with your more carefree friends. Thankfully, there’s a way to have it all — you just have to get creative with your activities and figure out the best places to make sacrifices. Here are six steps to whittle down the cost of down payment, get your savings in order, and creatively cut back so you can afford that new home.
1. Reduce the Cost of a Down Payment
You’ve probably heard the conventional wisdom that you’ll need 10 to 20 percent down on a home. However, that isn’t always the case, and there are some tactics you can use to reduce the amount you’ll need to save. For example, if you’re a first-time home buyer, you may qualify for some government programs. The USDA requires less of a down payment (sometimes zero) and offers a lower interest rate — depending on where you want to buy.
You may also decide to buy a contracted home, which requires you put a certain amount down and make rent payments until you’re ready to take out a loan of your own. Keep in mind that if you put less down, you’ll likely wind up paying private mortgage insurance (PMI). However, as the value of the house increases, you can later refinance and take PMI off.
2. Save Your Emergency Fund First
Your savings goal may be a down payment, but make sure you take care of yourself first. An emergency fund is there to cover any unexpected expenses that would otherwise put an unmanageable dent in your budget or curtail saving. How much you need in your emergency fund depends on your circumstances, but many experts recommend starting with $1,000. When you own a home, all sorts of expenses can crop up, such as replacing a roof or furnace. Rather than putting all your savings into a down payment, you need to make sure you have enough to cover any major repairs without going broke.
3. Invite People Over
There are plenty of ways to be social without spending money. If your friends love to go out, suggest they come to your place instead. Everyone can bring a dish or drink to pool resources, and you’ll have more peace to chat and spend quality time together. Be up front, and let them know that you’re trying to save money for a down payment on a home, but that you also want to have a social life while you save. True friends should be down for a movie night and homemade pizza, and you can promise them a great housewarming party when you meet your goal.
4. Save 10 Percent
Most people can find enough expenses to cut and save 10 percent of their income every year. Consider your current services and subscriptions. Are you paying for cable? Can you cancel your Amazon Prime membership for a couple years? Head to a running trail rather than shelling out for a gym membership? There will likely be some sacrifices, but if you put back just 10 percent every paycheck, you should have enough for a down payment in about 24 months.
Some other ways you can save 10 percent include taking your lunch to work and staying on top of free events or deals. Discounted movie tickets, community events, and store coupons can help you slash some of your “fun” expenses without missing out on too much.
5. Ask for Cash Gifts
Share your goals with absolutely everyone you know. Ask that if they’re going to get you a present for your birthday or Christmas, they could consider contributing to your down payment fund instead. Also, throw any windfalls you receive into your down payment fund. If great Aunt Edna leaves you $3,000, go ahead and put it into your savings. If you get a holiday bonus at work, don’t just let it sit in your checking account getting used up. Any extra funds can get you closer to your down payment.
6. Trick Yourself Into Saving Money
Find sneaky ways to save a buck or two. There are apps you can download that will round up purchases and throw the extra change into savings. Apps allow you to save almost mindlessly, but the amount can add up to several hundred dollars a year. Start a change jar that you throw real change into. When it gets full, go ahead and take it to the bank, and put the amount into savings. If you get a raise at work, immediately transfer the extra money in your paycheck into your savings account so you don’t get used to having more. Automate the process so that you never give in to lifestyle inflation and get used to spending the additional money.
Get Ready for Your Home Purchase
If you follow these tips and remain diligent, you’ll have enough for a down payment before you know it. While you’re saving, make sure all your credit cards stay paid off, and do the little things it takes to build an excellent credit score. You’ll have a much better chance of getting a decent mortgage rate if your credit is in the excellent range.
Holly Welles believes anyone can learn to make the most of their space. She’s a real estate writer with her own blog, The Estate Update, and a frequent contributor to Homes.com, Porch and other websites. Find more of her tips on Twitter @HollyAWelles.
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