Start saving for a down payment now with these simple tips

Saving up for your first house can be difficult and confusing, even to the most financially-savvy home buyer. Conventional wisdom says you’ll need at least 20% of the purchase price for a down payment, and after adding closing costs, taxes and fees, the bar to ownership can often seem too high. We’ll give you the details on down payments and tips to start saving for a home of your own. You will be surprised to learn how attainable homeownership can be.

What is a Down Payment?

A down payment is simply a portion of the home’s purchase price you pay up front. Whatever amount you put down is subtracted from the home’s purchase price, and your mortgage balance will be for the remainder. Down payments are typically due on the day you close on a home.

How Much Should I Put Down?

Most homebuyers aim for 20% of the purchase price when planning their down payment. If you’re looking at a $300,000 house, you would need $60,000 ready to put down. That’s a significant amount of money and can make owning a home seem unattainable. However, there are options where you might get the home of your dreams for as little as 3% down. FHA and other loan types offer lower down payments, but you’ll incur higher monthly payments and you may need to purchase private mortgage insurance. At 5%, that $300,000 home could require just $15,000 down.

What is Private Mortgage Insurance?

Private mortgage insurance, or PMI, provides some protection to lenders in the event of a borrower’s default. Making a down payment of at least 20% will release you from paying mortgage insurance and is one of the best ways to lower your monthly obligations. PMI will be added to your monthly bill by your lender, and you won’t recover these payments at any point during the life of your loan.

Tips to Save

We’ve compiled some quick tips to help make your real estate dreams a reality. Using these tips will get you started on the right path, and by making a smaller down payment, you could get your foot in the door even faster.

Set a Goal. Setting goals is a must to help guide your financial journey. Decide what’s important to you, and make goals accordingly. If you want a home sooner rather than later and aren’t as concerned about monthly payments, set a lower-percentage down payment goal. If PMI is something you’re trying to avoid, try saving longer and getting your savings over the 20% threshold.

Adjust Your Budget. Saving for a down payment might require some sacrifices and tough decisions. If you’d like to save a 20% down payment in five years, you’ll need to store away thousands of dollars a year. Take a look at your expenses and find places where cuts can happen to help build your savings. It all adds up, so any savings you can find will help.

Focus on the End Game. Staying laser-focused on your goals will help you achieve them sooner. Use technology to help you save automatically; scheduled deposits and apps that round up your purchases for savings can help you stack cash without even trying. If you receive a work bonus or other unexpected funds, stash them away for your down payment fund.

Consider what you can afford each month, start saving, and you’ll be in your own home in no time.

FINANCES FYI is presented by Evergreen Credit Union, serving all Southern Maine and committed to helping Mainers of all ages better manage their financial lives.