Saving for a house or owning a dream home is the goal of every individual. It looks challenging at first thought, but it will be easy if you have a realistic plan, proper understanding, and a disciplined approach.
You should start saving for a down payment in your 20s if you have a steady income and have enough space to save. Or you can start saving 5-7 years before buying a house. A disciplined approach of setting a goal, tightening the budget by finding cutbacks, saving maximum, earning extra, and automating saving in a separate high-yield savings account will ease your task of saving for a house.
I have gathered important questions and answers from a group discussion among financial savers, where they talked about when, how much, and how to save for buying a house. I think this conversation will answer all your questions regarding saving for a home.
Table of Contents
What age should you start saving for a house?
There are many questions regarding when to start saving or at what age one should start saving for a house or a down payment on a house.
Here is a discussion about when to start saving for a house between financial savvy.
When to start saving saving for a house?
The question was raised by Sophia, who asked, “What age should I practically start saving for a house?”
Start in your 20s
Mike responded to Sophia, “The short, simple answer is as early as possible. If you are looking to take advantage of compound interest, you should start in your early 20s. Saving early will help you to build a habit of saving and build a strong foundation even if you are planning to buy a house after 8-10 years. It will help you to reduce stress and provide you with more flexibility.”
The real-life example
“I agree with Mike! I started saving at 21 with the guidance of my parents. I did not start it with a specific goal, but it helped me to purchase a house at 27. At that time, there were enough funds in my savings account for a down payment.” Jake added.
This conversation proves that it is better to start saving in your early twenties if you are planning to buy a house in the next 5-7 years. You have a big opportunity to accumulate a big fund if you can start saving in your 20s. Singles can work till late at night to earn extra dollars. They need to spend less as they do not have children. Singles can save on rent in their 20s by living in a small space or with their parents. Also, they can ask for a raise in salary as they are flexible to switch jobs.
How much to save for a down payment and closing costs?
Before learning about how to save, it is essential to know what a down payment and closing costs are in a mortgage loan.
What is a down payment?
It is a percentage of the total property price that you pay upfront when buying a house, a car, or any other asset.
What are mortgage closing costs?
Expenses and fees you pay to secure a loan, like attorney fees, appraisal fees, escrow funds, etc., are considered closing costs.
You should research and decide the anticipated rough cost of housing to find out how much down payment you will need.
Here is a conversation regarding the down payment and closing costs.
How much to save for a down payment?
Tom asked, “How much down payment do I need for a house costing $259,000?”
For conventional loan
Sarah suggested, “If you are looking for a conventional loan, then you need as little as 3% of the property price, and that is $7,770 as a down payment. This percentage can increase up to 15% based on your personal finance situation and type of property.”
For FHA loan
Mike added, “If you have a good credit score, you need a minimum of $9,065 (3.5%) as a down payment for FHA loans. It can be more than 10% as well for an individual having a poor credit score.”
For VA and USDA loans
“You need little or no down payment in VA and USDA loans if you are eligible for any of them. But both have specific eligibility criteria. Veterans, service members, and their surviving spouses are eligible for VA loans.” contributed Sarah.
How much to save for closing costs?
Tom raised another question, “And what about closing costs?”
Save for closing cost
Sarah responded, “It can be anywhere between 2% and 6% of the loan amount. Considering the cost of the house down payment amount ($259,000 – $7,770), your loan amount will be $251,230. You would pay from $5,024 to $15,073 in closing costs”.
“Considering the minimum percentage of down payment (3%) and closing cost (2%), you should save $12,794 ($7,770 + $5,024) to buy a house of $259,000,” Mike added.
Sarah says, “You need to save $356 each month to buy a house after 3 years, $267 each month to buy a house after 4 years, and $213 every month to buy a house after 5 years.”
Summarizing the conversation, you should know the total cost of the house, and based on that, you will get an idea about how much down payment and closing cost you will need to save for a house. You can calculate house cost by considering construction cost, market value based on property type, location, size, layout, and included amenities; legal charges; and other fees.
Also, you can consider adding lender fees, insurance fees, inspection charges, repairs, furnishing, and lawyer charges in calculations.
How to save money for a house
Now you have a clear idea about when to and how much to save for a house down payment. Now the budgeting part comes into the picture to learn how you can save for a house in your 20s and 30s.
Here is the conversation opened again by Tom.
How to save?
Tom started the discussion, “Can you explain the best ways to save for a house?”
Lisa asked as well, “My question is nearly the same. How to save for a down payment?”
Set a goal
“You should set a clear goal to start saving. You need $12,794 for a down payment and closing costs, right? Keep that number in your mind and start progressing accordingly. You can consider a down payment goal as a bill that you have to pay each month.” Replied Sarah.
Create an emergency Fund
Amy suggested, “Make sure you have enough emergency funds for no work for 3-6 months before considering buying a house. “
Open a separate savings account
“The first thing you need to do is open a separate high-yield savings account to save and earn decent interest on the down payment fund collection. A money market fund account is a good alternative to earn higher interest on savings.” Mike added.
Automate Savings
“Also, you can automate your savings to keep yourself on track. It will reduce your nonessential spending automatically.” Supplementary addition from Mike.
Allocate funds from income
Amy says, “You can consider allocating 10 to 15% of funds in down payment savings from your monthly income.”
Decrease spending
Sarah suggested, “You should control and cut back on your spending, like impulse buying, eating out, unwanted subscriptions, and traveling for vacations. Consider moving to a small place or finding a roommate. You should redirect all these savings into the home down payment fund’s savings account.”
Limit debts
“Also, you can pay off debts and loans having higher interest rates to increase savings. Avoid using credit cards.” Says Mike.
Save bonuses and raises
Amy shared, “Whenever you get raises like tax refunds, bonuses, or salary increments, send them towards a down payment savings fund. The same thing you should apply to windfalls like winning a lottery or gifts from friends and family”.
Save from savings
Mike added, “Whenever you buy items on a discount, move that discount amount towards the house savings fund.”
Increase Income
“You can save faster by earning extra money from freelancing, a part-time job, or a side hustle. One of my friends is earning a decent amount from freelancing work.” Jake suggested.
Reduce focus from other goals
Sarah added, “If you are overinvesting in other goals like retirement or buying a car, then stop it temporarily and move that fund towards a home down payment savings account.”
Use first-time homebuyer programs
Jake says, “You can look into first-time homebuyer programs if you don’t have your own home. You can get down payment assistance or grants from authorities.”
Consult an expert
“I suggest you discuss with your financial advisor to make a realistic saving plan as per your income.” The Discussion was concluded by Sarah.
The above discussion has explored all possible ways to improve savings for a down payment. Apart from the above, there are several more ways of saving, like
- Save money on electricity bills by reducing electricity usage.
- Negotiate your bills with service providers to lower bills.
- Use popular 50/30/20 or 70/20/10 rules to create an effective budget and save.
- Save money on food, shopping, transportation, flights, and hotel bookings.
Small savings will grow bigger over time.
Maria’s Inspiring Journey: How She Saved for a House on a Low Income
Here is the inspirational story of Maria, who lived with a low income but still managed to save $13,500 in 3 years for a home down payment.
She was working as a cashier at a local retail store with a lower salary. Her salary was sufficient to cover daily expenses only, but there was no space to save from it. She decided to own a home despite her lower income. With the intention of owning a home in 3 years, she crafted a tight budget with a focus on reduced spending and more savings. She immediately stopped unnecessary spending, like canceling magazines and other unwanted subscriptions, started preparing meals at home instead of eating out, etc.
She lived a minimalist lifestyle for 3 years. By saving little every day for three years, her dedication paid off. She accumulated $15,700, which was much more than her targeted amount of $13,500. Everyone, including her friends and co-workers, admired her financial discipline. She encouraged everyone to work harder and be financially savvy. When she bought a home by paying a down payment, she understood that it was not just about buying a house. It was about proving herself.
You can turn your dream into reality if you have a clear and focused goal and can adjust accordingly.
Key Takeaways
It is essential to start saving for a house as early as possible. You can earn and save more at an early age. You can start small and invest your savings in a safe and secure account to earn interest on savings. Saving consistently over time will help you build up enough corpus for a down payment.
Frequantly Asked Questions
How are all saving for a house?
You can open a high-yield savings account and automate your savings. You can create a tight budget with reduced spending and allocate more funds towards house savings. Start earning extra and cut back your spending.
How to save for a house in 2 years?
It depends on the cost of the house and your yearly income. You will need an aggressive saving plan. Cut all nonessential expenses, earn extra, reduce savings in other non-priority goals, and put money in a money market fund or high-yield savings account.
How to save for a house while renting?
First of all, you have to reduce rent by moving to a small-sized house or finding roommates. Whenever you pay rent, put the same amount in a house savings account. Also, you should consider reducing your unnecessary spending.