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    How to Start Saving Money to Buy a House

    Lisett Comai-Legrand

    Lisett Comai-Legrand About The Author

    Feb 13, 2018 6:11:00 AM

    how to Start Saving Money to Buy A House | How to Save for a Down Payment | First Time Home Buyer Trying to Save Money | First Alliance Credit Union Rochester MNThe process of buying a home should start long before you start house hunting. The first step in buying a house is actually to start saving for a down payment. Which can seem like a pretty overwhelming task, as it will take time and patience to accomplish. To make the process a little less stressful we have put together the basics on how to start saving for a down payment for buying a house.

    How Much of a Down Payment Do I need to Buy a House?

    It is common for mortgage lenders to request at least a 20% down payment on a home. Now 20% can seem pretty steep, considering for example, that 20% of $200,000 is $40,000.

    The good news is that there are plenty of mortgage programs that will allow you to put down much less, especially if you are a first time home buyer. For example, an FHA loan (Federal Housing Administration) loan offers a 3.5% down payment through participating lenders. FHA loans are usually easier to qualify for and have slightly lower rates than conventional mortgage loans. A 3.5% down payment on an FHA mortgage loan would be $7,000 as opposed to $40,000.

    The best way to know how  much down payment you need is to meet with a mortgage lender to discuss your options, like how much house you can afford, what your monthly payment may look like, and of course your down payment. Once you know how much down payment you need, you can start to build a savings plan to reach your goal.

    Why are Down Payments to Buy a House Important?

    Down payments are important because they create "equity." Your home is one of your most valuable assets, and helps to create wealth. For example, let's say you do put $40,000 down on a $200,000 loan. Your mortgage balance becomes $160,000, so you're making monthly payments on $160,000 as opposed to $200,000, and you automatically have $40,000 of equity in your home.

    Let's assume that in two years, you sell your home. Your mortgage balance is now $150,000, and you sell your home for $220,000, because home values increased. Which means your $150,000 mortgage balance is paid off, and you walk away with $70,000! That is cash that can be saved, invested, used to pay off debt, or used as a down payment on your next home.

    Equity can also be used as a borrowing source. Many people use the equity in their home to make home improvements, consolidate debt, pay for college and more. Some people consider their equity an emergency fund, just in case something really bad happens and they need access to cash. So, the more money you can save for your down payment the more equity you will have available to you sooner should you need it.

    Can I Buy a Home With Less Than a 20% Down Payment?

    Yes, you can still buy a home with less than 20% down. It just means that you will likely be required to purchase mortgage insurance. Mortgage insurance is protection for your lender (not you) in case you default on your loan. It will be an additional charge you pay either at the closing of your mortgage or it will be added to your monthly mortgage payment, each lender has different requirements. The only way to avoid this charge is typically with a 20% down payment.  

    Quick Tips to Save for a Down Payment on a Home

    Set up automatic transfers from your checking account to your savings account. This way the money is automatically deposited into your savings, and you didn't have to lift a finger.

    Save your spare change and bills. This may seem a little weird, however, you'd be amazed at how quickly this adds up. Use a jar, a pail, a bucket, and every time you have spare change or bills, drop it in and forget about it.

    Save  your raise. When you get a raise, take the amount of the increase and put that directly to savings. You were doing just fine with your finances before the increase, right?

    Set aside extra cash like bonuses and tax refunds. When you receive a bonus or a tax refund, put them directly into your savings account. After all, you didn't have this money to begin with.

    Refinance existing loans. Do you have a vehicle loan or a personal loan, maybe some credit card debt? Consider refinancing or debt consolidation to lower your monthly payments. Take those monthly savings and put them into your savings account. If your car is paid off, consider keeping it. Take the amount that would have been your new car payment and put that into savings.

    How to Maximize Your Down Payment Savings

    Once you know how much of a down payment you need, consider how you will maximize the money you are saving for your down payment. There are several options besides a normal savingins account to keep your house fund growing quickly.

    • A money market account typically pays higher interest rates than a regular savings account and you can still easily add more money at anytime. 
    • Certificates of Deposits typically pay higher rates than savings accounts and money markets. Certificate terms generally range from 1 to 5 years, so you can choose the term that works for you. There are early withdrawal penalties for certificates, so its important that you choose the correct term.
    • Minnesota residents have the option for a First-Time Homebuyer Savings Account. These accounts were introduced in 2017. What's cool about these accounts is that you can subtract the interest earned on the savings account from your Minnesota state taxable income.

    Final Thoughts on Saving for a Down Payment on a House

    Saving for a house can be easier than you think. The key is to create a plan that has actionable steps and stick with it. With a little time, patience, and planning you'll have that 20% down payment for buying a home before you know it. 

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    We do our best to provide helpful information but we cannot guarantee the accuracy or completeness of the information presented in the article, under no circumstance does the information provided constitute legal advice. You are responsible for independently verifying the information if you intend to use it in any way. Additionally, the content is not intended to be reflective of First Alliance Credit Union’s products or services, for accurate and complete details about our product and service information you must speak to an advisor at First Alliance Credit Union.