Real Estate Education: Buyers
Article 4 for Homebuyers: 9 Guaranteed Ways to Save for a Down Payment
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9 Guaranteed Ways to Save for a Down Payment
This is the third real estate article in my series written just for people in the Hingham area and the South Shore of Massachusetts who are ready to buy a house. Some of the steps vary, depending on whether this is your first time buying a home, or if you are a home buying veteran. Most of these articles are written with the perspective of a first time home buyer, but veteran home buyers can also glean some useful information.
Save for a Down Payment on a Home
When you start saving for a downpayment on a new home, remember you also have to save for closing costs (not as much as downpayment, but there are always cash payments due when you sign all the papers for your new home). It is also wise to put some money aside for the inevitable repairs and home maintenance costs that are a normal part of home ownership.
Putting together a down payment is a daunting hurdle if you are a first time home buyer. It might seem inconceivable that you can actually put together enough money to own you very own house. Keep in mind that most homeowners were once in your position and figured out ways to save enough. Last year alone, about 1.4 people purchased their first home without any equity from a prior home sale. If they can do it, so can you. All it takes a little discipline and some changes to usual spending habits.
Knowing how much house you can afford to buy is important, but let’s get that savings account growing first. There will be plenty of time to look at you price range as you build up the down payment.
Downpayment Amount Needed to Buy A Home
Most lenders want 20% or more of the home’s selling price to give you a mortgage. Even though there are home financing options out there where less is required, I always suggest aiming for that high percentage number anyway. This will give you optimal flexibility when shopping for mortgage loans. But like I mentioned, we will address how to determine the amount of mortgage you can afford in one of the next real estate articles.
9 Ways To Save for a Downpayment on a House
It is important to note that most lenders want proof that the money you have for a downpayment is yours, and only yours, with no strings attached. Borrowing a chunk of money from a friend or relative with the expectation of repayment or interest will not qualify as part of your downpayment. Conversely, if you received a gift in the form of money, as long as the generous person who donated the cash writes a letter stating that the money is not to be repaid, you can use this money as part of, or all of your down payment.
Here is a list of 9 tested, guaranteed approaches to saving for a down payment:
1) Open a savings account TODAY.
2) Set up automatic transfers into your new savings account.
3) Know your monthly expenses.
4) Consider subscribing to streaming movies and television.
5) Skip Starbucks and Dunkin’ Donuts.
6) Cut out or minimize meals out.
7) Consider a less expensive gym membership.
8) Know your thermostat.
9) Think creatively.
The adjustments you need to make are not as extreme or harsh as you might think because there are leaks in the system that you don’t even see. Money leaves our hands silently and without our realizing it, kind of like a trickle of oil from your car’s engine, that, once found, can extend your power to save.
The goal is to think about the unnecessary expenses that you don’t notice, or blindly shell out money for. We all spend about 10% more than we make each year. These dollars are not spent on necessary items or services, but silent extras.
Get a Local Passbook Savings Account
The first thing I suggest is to immediately open a dedicated, savings account for your down payment. A checking account is useful for the streams of money coming in and going out. What you want is an account that doesn’t leak money as easily. There is a psychological positive to seeing your money grown over time too.
Consider using a different bank from that of your checking account to further protect your down payment money from siphoning. Find a bank that is along your commuting route or very close to your current residence. Proximity plays a huge role. Like a gym, the closer it is, the more you will use it.
Get the kind of savings account that comes with an old fashioned passbook too. It will make withdrawal more difficult and let you see the numbers each down you make a deposit. The immediacy of seeing a higher number is a powerful, positive reinforcer.
Automated Deposits Magically Expand Your Savings
I also suggest setting up automated deposits form your employer if that is possible. Even if you redirect only $20 a week towards that savings account, you will have over $1,000 by the end of one year.
Your Budget Notebook
Credit and debit cards are a brilliant invention of commerce and allow us to glide along without noticing where are dollars are going. Keeping track of what you spend each month, and on what is a boring task, but one that you must do. Over 75% of people no longer balance their checkbooks and instead rely on online banking to check the balance of an account. This tendency carries over into knowing one’s monthly expenditures.
Decades ago, keeping a budget was commonplace, but nobody does that anymore. Even though I am hard pressed to believe that you will do this, I am going to suggest it anyway. Get a small notebook and write down every single thing you spend money on. Write it down the moment you spend it. Thinking you will remember it later is a mistake, because you won’t. Our brains are trained not to.
There are some items you can write down for your monthly exercise before you start to record day to day spending. These are things that are the fixed, monthly bills that don’t fluctuate. Any auto loan payments, insurance, cable bills and wireless provider payments are examples of fixed amount payments.
You will need this budget when you take the step of applying for a mortgage or a pre-approval letter. And once you gather the data, perhaps you can extend your savings by seeing what else is on your list aside from the expenses mentioned here.
Save $100 a Month by Changing Your Cable Plan
Chances are, you have a cable television service that runs about $200 to $250 a month. There are multiple options for more and more full television and movie streams. The most popular is Netflix at $10 a month with the first month free. Hulu is $8 a month and also includes a free trail and Amazon Prime is $99 per year or $8.25 a month. A service that features more unusual movie content is Mubi and that costs just $5 a month.
Even if you are a movie and television junkie and choose all of these online streaming services you will only spend $31 a month, saving at least $100 on your cable TV package. You will still have to pay for the basic packages through your cable provider because without internet access, you cannot stream anything without incurring huge data charge on your cell phone.
Coffee Rituals Cost Money
Coffee is a worldwide ritual. A lot of people make Dunkin’ Donuts or Starbucks a regular stop each day as part of this ritual. Consider saving $2,000 a year instead by making your own coffee. And if the home buying plan involves a significant other, double your savings to $4,000 a year.
Just on coffee and cable alone, you have already saved up a possible $5,200.
Dinners Out and Workday Lunch
If you buy your lunch every work day and have regular dinners out, you are spending about $3,600 per year as a couple. Brown bagging lunch saves about $800 a year and nixing weekly dinners another $2,800. Don’t think about missing dinners out as absolute and forever. You can work a monthly night out into your savings plan, and once you are settled into your new home, figure out what financial flexibility you have.
Now you have saved $8,800 towards a down payment.
Shop Around for Gym Memberships
Looking at some other things to change while you save for your house, the health club membership comes to mind. Regular exercise is important on so many levels, but paying top dollar is something to consider. Maybe there are less expensive options, or a health club option through work. There are also some ways to get your exercise on your own. The average monthly fee for a decent health club is about $60 a month for an individual, and $90 for two people. Your savings for the year could grow by $1,080.
This puts your savings at $9880.
Climate Change at Home
The thermostat is an oft neglected thing on the wall that can, with some attention and mindfulness, save you hundreds of dollars a year. It is an easy thing to overlook but ultimately should be as important as locking your door when you leave your house.
Think Creatively About Saving Money
There are many more ways to sock money away. I just gave you the most obvious approaches.
Why not nix the lawn mowing service if you have one? Or put the $30 you give the kid to shovel in your savings account by shoveling the walks and driveways yourself. Pots of autumn Mums and hanging baskets overflowing with spring Impatiens are lovely but cost money. If you live in a densely populated are, consider shopping around for prices. Places like Ocean State Job Lot get brand name items on a regular basis. The Good Will in Quincy or Wellspring in Hull are known for having treasures stuffed into their racks for people who will dedicate the time to sort through.
One real estate customer of mine had a wide-mouthed, one gallon jar where he put every $5 bill he got back as change, or found in his pocket. I recently heard that certain banks have programs where every purchase you make is automatically rounded up to the nearest dollar. The change then goes into your linked savings account. Bank America is one such bank that offers this.
Bonus List! Some Free Apps That Will Help You Save Money
Thank you to Buzzfeed and Mallory McInnisfor reviewing these apps!
We all keep gift cards hoping to someday use them. Try using the app Raise to exchange those useless cards for cash.
When you purchase online and then the price dips the next day, sometimes you can get the difference back. Slice will help you get your money back.
Cartwheel is a coupon finding app that presents hundred of offers a day within just as many categories. If you find something you want in a store, scan the barcode and Cartwheel can tell you if a coupon exists for that item.
Ibotta asks you to complete some easy tasks so you can get cash back rewards on certain items. Some examples of retailers that the app targets are Costco, Kohls and Walgreens.
The BerryCart app allows you to save money on things that are natural and/or organic.
Level Money is an app that helps you stay within your budget parameters. It gives you feedback about how much money is left to spend in your budget for the day, week, and month.
Good luck with your savings plan and check back in a few days for my next real estate education article.
As always you can feel free to contact me with questions about real estate, selling your home or looking at houses to buy. I am always available for calls or text messages on my cell phone at 781-724-7622, and you can also email me at email@example.com.