How To Save For A Down Payment On A House: Tips And Strategies

Are you a first-time home buyer or just someone interested in purchasing a new house? Saving for a down payment can be one of your largest financial challenges, but it's not impossible. In this article, we'll provide various tips and strategies for how you can save for a down payment so that you can be financially prepared to purchase your dream home.

Deciding How Much To Save For A Down Payment On A House

When buying a home, the down payment amount is a percentage of the purchase price. There is no set maximum amount for the down payment, but the higher the down payment, the lower the risk you pose to lenders. If you can pay at least 20% of the price of the home at closing, you will almost always be eligible for a lower interest rate. Even a small decrease in an interest rate can save you thousands of dollars of interest paid over time. The specific amount you should save for a down payment depends on the type of mortgage you are borrowing and your financial situation. If you can afford it, paying 20% down can allow you to avoid private mortgage insurance (PMI). However, it is important to remember to be very careful if you decide to use emergency funds for a larger down payment.

With two strategies, let's explore how much you need to save for a house down payment.

Saving For A Down Payment By Mortgage Type

The type of mortgage you choose can have a significant impact on how much you need to save for your down payment when buying a home. The minimum down payments required for different mortgage types include, but are not limited to:

• Federal Housing Administration (FHA) loans: The minimum down payment for an FHA loan is typically 3.5% of the purchase price of the home. This means that if you are buying a home worth $200,000 with an FHA loan, you would need at least $7,000 as a down payment.
• Conventional loans: Conventional loans may require a higher down payment compared to FHA loans, but they have fewer costs and fees. The historical down payment for a conventional loan is 20%, however, most home buyers can qualify for a conventional loan with only 3% – 5% of the purchase price as a down payment. Using the same example as before, if you are buying a $200,000 home, you would need a minimum of $6,000 – $10,000 down on a conventional loan. If you want to avoid the extra cost of mortgage insurance, you’ll need to save $40,000 (or 20%) as a down payment.

Department of Veterans Affairs (VA) loans: VA loans are available to eligible veterans, active-duty service members and their spouses. One of the main advantages of VA loans is that they do not require a down payment. This means that if you qualify for a VA loan and are buying a $200,000 home, you may not need to save any money for a down payment.

Putting More Money Down

Saving for a property is a significant financial decision, and one of the ways homeowners achieve this is by making a larger down payment. But why is that? Let us break it down for you.

When you make a substantial down payment, you are reducing the amount of money you need to borrow from the bank or lender. This can benefit you in several ways. First, it can lead to lower monthly mortgage payments. Borrowing less money means that your monthly payments will be lower than if you had taken out a more significant loan.

In addition to lower monthly payments, a larger down payment can positively impact your loan terms. Lenders often view borrowers who make larger down payments as less risky. By putting more money down, you are demonstrating your financial stability and commitment to the property. This can lead to more favorable loan terms, such as a lower interest rate or even the ability to avoid private mortgage insurance (PMI).

Let’s provide you with an example to illustrate the influence of a large down payment on your home purchase and loan terms. Suppose you are looking to buy a home worth $300,000. If you make a 20% down payment, which amounts to $60,000, you would need to borrow $240,000. Assuming a 30-year fixed-rate mortgage with an interest rate of 7%, your monthly payment would be approximately $1,597. Now, let's say you decide to make a larger down payment of 30%, which amounts to $90,000. In this case, you would only need to borrow $210,000. With the same mortgage terms, your monthly payment would now be approximately $1,398. As you can see, a larger down payment not only reduces the amount you need to borrow but also lowers your monthly payment by a significant amount.

4 Tips On How To Save For A Down Payment On A House

Saving for a down payment on a house can be overwhelming and seem unattainable at times. But don't worry, we've got you covered. If you follow these four tips, we can assist you in saving up for your down payment and achieving your dream of owning a home.

1. Determine Your Savings Goal

Saving for a down payment can seem daunting, but the first step to achieving this goal is to set a specific savings goal. Establishing a clear goal not only helps you determine when you're ready to purchase a home but also aids in devising a specific savings plan that's tailored to your needs.

• When deciding on the amount to save, it's important to consider the cost of the home you intend to buy. Use a home affordability calculator to determine what you can afford based on your credit score and debt-to-income ratio.
• Once you've established your savings goal, it's easier to create a savings plan and incorporate this into your monthly budget. This way, you can make steady progress toward your savings goal and be one step closer to owning your dream home.

2. Create A Budget

Creating a budget is crucial when saving for a down payment, for several reasons:

• It can help you determine how much you can realistically save each month based on your monthly income and expenses.
• Budgeting for a house can highlight areas where you can cut back to save even more. For instance, if you notice that you consistently overspend on food, you can start changing that habit and free up more funds for your savings.
• Your budget can help you decide whether buying a house is feasible.

By creating a sample budget that includes your potential mortgage payment, utilities and other expenses, you can determine whether you have sufficient funds to cover these costs. If not, you can adjust your budget accordingly or save more money until you are financially ready to make the investment.

3. Find Down Payment Assistance

If you're in the process of saving for a home down payment, you don't have to go it alone. There are several options available for down payment assistance that could pay for some or all of your down payment. Some programs provide grants, while others offer loans that you'll have to pay back in the future.

The eligibility requirements for down payment assistance can vary based on your location. Some programs may have certain restrictions concerning your credit score and income that you'll need to meet to be eligible. However, if you qualify for these programs, they can help you save years of time that you'd otherwise spend on saving for your down payment.

4. Open A Separate Savings Account

When you begin saving for your down payment, it is advisable to open a new savings account specifically for this purpose. There are several advantages to having a separate account for your down payment savings, rather than using your regular savings account.

First, many online financial institutions offer high-yield savings accounts that provide you with the opportunity to earn much more on your savings than you would with a traditional bank account. Although the interest earned in a high-yield savings account is insignificant, it can still offer a little extra help toward your savings goal.

Second, keeping your down payment savings in a separate account ensures that it is not easily accessible for other purposes. While it may be tempting to keep your savings in your checking account or in a savings account linked to your checking account, this would make it easier to spend the money on impulse purchases or other expenses that may arise. 

However, with a separate savings account, transferring the money to your checking account would take a few days. This delay serves as a barrier that prevents you from making impulsive purchases and helps you to safeguard your hard-earned down payment savings.

Moreover, since savings accounts limit the number of withdrawals you can make in a month, you are restricted in terms of how much money you can withdraw from your down payment savings for other purposes.

How Long Saving For A Down Payment Takes

Saving for a down payment depends on various factors, such as your monthly income, expenses, and the amount you want to save. On average, it takes about 6.5 years for a renter to save a 20% down payment. However, keep in mind that you don't necessarily need to put down 20%.

If you are looking for an easy way to calculate how long it will take you to save for a down payment, you can divide the total amount you plan to save by the amount you can save each month. The result will give you an estimated number of months it will take to save your down payment.

Where To Keep Your Down Payment Savings

Saving for a down payment requires careful consideration of where to keep your funds. The location of your savings plays a crucial role in ensuring that your money is secure and easily accessible. One option is to keep your savings in a traditional savings account at a bank, which allows for easy access to your funds when you need them. Another option is a high-yield savings account, which offers better interest rates than a regular savings account. Additionally, you can consider a certificate of deposit (CD) that offers a fixed interest rate over a specific term. However, if you are willing to take risks, you can explore investment options like stocks or mutual funds, but it's important to carefully consider the potential risks and returns associated with these investments.

Savings Account

Opening a savings account is another option where you can keep your down payment savings. If you open a savings account, you can keep your money secure while earning interest on your balance. It's a convenient and straightforward way to access your funds whenever you need them. Moreover, savings accounts are typically backed by the government, providing an additional layer of protection for your money. By keeping your down payment savings in a savings account, you can be confident that your money is secure and steadily growing over time.

High-Yield Savings Account

Creating a high-yield savings account is another suitable place to keep your down payment savings in a safe place. This type of account offers competitive interest rates, which can help your savings grow faster compared to a regular savings account. It is also a convenient and accessible option for keeping your down payment savings secure. Unlike other investments, a high-yield savings account offers a low-risk option to ensure your money is readily available when you need it.

Retirement Account

If you're planning to save money for a down payment, you might be wondering where to keep your funds secure. A retirement account can be a great option for achieving this goal. You can utilize a 401(k) or an IRA account for this purpose, which can offer you several benefits.

Firstly, these accounts come with tax advantages, which enable your savings to grow more efficiently. Keeping your down payment funds separate from your regular savings can also help you resist the temptation to use them for other expenses. Additionally, some retirement accounts even provide the option to borrow against your savings for a down payment, which can be incredibly helpful.

Other Home Buying Costs To Save For

As you go forward in buying a new home, it’s important to remember that there are other home buying fees and costs to save for in addition to the down payment. Some key home buying costs to consider saving for along with the down payment include, but are not limited to:

• Closing costs: When purchasing a home, you’ll need to pay various closing costs, including fees for the loan application, appraisal and title search. Buyers can usually anticipate the range of 3% – 6% of the loan amount.
• Moving expenses: Moving to a new home involves costs such as hiring professional movers, renting a moving truck and purchasing packing supplies. Buyers can anticipate paying moving costs of around $800 – $1,600 for local movers, but a move of 100 miles or more can cost between $2,200 – $8,000.
• Home appraisal: When you buy or refinance a home using a mortgage, the lender will typically require a home appraisal. This process is conducted by a certified and impartial third-party appraiser who will evaluate the property and compare it to similar homes in the area to determine its fair market value. The cost of a home appraisal can range anywhere from $600 – $2,000, depending on the complexity of the appraisal.

FAQs On Saving For A Down Payment

Let’s now look at some frequently asked questions on saving for a down payment.

When should I start saving for a house?

You should start saving for a house as soon as possible. Saving for a down payment takes time depending on how much you’re able to save each month. If you’re not able to save as much, starting sooner will ensure you have enough time to save up for your down payment to buy a house when you want or need to.

Should I make a large or small down payment?

The decision of whether to save for a large or small down payment depends on a number of factors. The increasing home prices may make it tempting to go for a small down payment. However, a larger down payment can lead to a lower monthly payment and help you qualify for a lower interest rate. Ultimately, it's up to you to determine the best option based on your individual situation.

What is the average down payment on a house?

For first-time home buyers, the average down payment on a house is around 6% of the total home cost. On the other hand, repeat buyers typically pay 17% upfront. However, the actual amount you need to spend varies based on the current state of the market and the type of loan you opt for.  

Can I put $0 down on a house?

It is possible to purchase a house with no money down. The government offers USDA construction loans and USDA loans to promote development in rural and suburban regions. With a USDA loan, obtaining financing without putting any money down is possible. Additionally, USDA loans typically have lower fees compared to other types of loans.

The Bottom Line

For many individuals, buying a home is the biggest financial investment they will ever make. One of the first significant financial obstacles in this process is the down payment, which often requires borrowers to save tens of thousands of dollars. You can begin saving for your down payment by learning how to budget your money and find where you can keep your down payment savings. Overall, it's important to research and find out how to qualify for down payment assistance programs. If you are ready to begin the approval process, you can start with Rocket Mortgage^® today.