If you have been thinking about buying a house, it’s never too early to start saving. Most home sales require 20% of the purchase price as a down payment, or substantially less if you are a first-time homebuyer. The sooner you start saving, the sooner you will be ready to do some serious house hunting.
Even though home ownership is part of the American dream, the number of Americans who actually own their home has been on the decline. In 2009, the United States ranked with other post-industrial countries with a home ownership rate of 67.4%. In 2018, the home ownership rate dropped to 64.2%. Home ownership in the state of Washington hit a low of 61.6% in 2016 but is now starting to climb.
If you have been watching the housing market, you know that there are fewer homes for sale. You also know that following the subprime mortgage crisis of 2008, criteria to get a mortgage have stiffened; you need better credit and more available cash to buy a home.
While these statistics may look glum, they also mean that this is the perfect time to buy. With home sales down, lenders are looking to provide more home loans, and they are becoming more creative in helping borrowers qualify for loans. But first you need to build a nest egg for the down payment.
Everything Starts with a Budget
Before you can buy a home, you have to determine how much you can afford and how much you need to save, which means starting with a household budget.
The first step is matching your income to your expenses. Polls show that 78% of Americans live paycheck to paycheck, so your immediate goal is to ensure you earn more than you spend, which will allow you to save. Take a hard look at your expenses and categorize your spending into needs, such as rent and groceries, and wants. Be honest in your assessment. For example, do you need the premier cable television service or unlimited data on your cell phone, or can you do with less to cut your expenses?
With a well-thought-out household budget in hand, you will have some idea about how much you can save every month. Now consider what type of home you want. Check home prices in the neighborhood you are considering. Determine the number of bedrooms and bathrooms you need and whether you need off-street parking, a yard, and so on. Once you have a general idea of housing costs, you can determine how long you will have to save to accumulate enough for a down payment.
Finding More to Save
There are only two ways to increase the amount of money you can save: Increase your income or cut your expenses. Ideally, you will want to do both.
There are limited ways to increase your income. You can try to find a better-paying job or take on a second job, but there also are simpler strategies to add income:
- Choose the right bank accounts. Be sure your money is working for you. Many checking accounts pay interest on deposits, or they have other features such as rounding up on spending and placing those pennies in a savings account. You also will need a savings account that offers a competitive interest rate and lets you save using strategies such as automatic transfers from checking to savings each month.
- Buy certificates of deposit. CDs generally offer higher interest rates. If you are planning to buy a home in a year, two years, or three years, then locking your money away in a 12-, 24-, or 36-month CD will keep it secure and allow you to gather more interest.
- Invest. You also can build passive income by investing. However, be sure you work with a financial advisor who can help you with lower-risk investments. Buying stocks or bonds is never a sure thing, and they could lose rather than earn money, especially with short-term investments.
Also consider ways to cut your overhead to increase your savings. Here are some money-saving strategies to consider:
- Save every day. Cut out nonessentials such as that morning latte. Take public transit to save on gas and parking. Cut back on eating out. Think of little ways that you spend money every day and see if you can cut your expenses. However, make sure you stash the money you save instead of spending it elsewhere. If you save $3 on coffee, put $3 in your savings account.
- Save as you spend. Many banks and credit unions make it easier to save by rounding up your debit card spending and placing it in your savings account. iQ Credit Union, for example, has Easy Saver, a free service that rounds up each debit card expense to the nearest dollar and puts it in your iQ savings account.
- Cut your living expenses. Consider renting a less expensive apartment or adding roommates to offset rent. Cut back on grocery spending with strategies such as meatless Fridays or eliminating junk food from the shopping list. Take a hard look at the bills each month, see where you can cut, and be sure to transfer the difference to your savings account.
- Cut travel costs. When possible, take public transit or consider using Uber or Lyft instead of your car. Maintaining an automobile is expensive when you consider gas, insurance, maintenance, and other car payments. If you can use the car less or eliminate it altogether, you will save money.
- Earn cash rewards with a credit card. If you can control your spending, then using your credit card instead of your bank card can leave more cash for savings. Use cash-back credit cards and save the money you get back.
These are just a few ways you can generate money to put toward a down payment on a new home. Your credit union can help. Since credit unions are member-owned, they tend to offer better interest rates and financial services tailored to meet the needs of members, including assistance for new homebuyers. Credit unions such as iQ also have a variety of mortgage products and can help you find the right home loan for your needs.It’s never too early to start saving. Contact our home loan experts at iQ Credit Union today to get started.