Saving for your Down Payment

The first step towards purchasing your own home is to save for your down payment.  With our local market values, this can be a daunting task.  Here are a few suggestions to help you get started.

Estimate how much you need to save

As you begin to think about purchasing a home, you will familiarize yourself with the local communities and available housing.  After researching the market you will determine a price range goal based on your wants, needs, and income.  Ideally you will set a savings goal of 20% of the purchase price.  While there are various loan programs requiring different percentages for a down payment on the purchase of a home, a traditional mortgage generally requires 20% of the purchase price in order to receive the best possible interest rate and to avoid private mortgage insurance.

Determine the timeline for your goal

Once you have determined your target down payment amount, set a timeline to reach this specific goal.  If you will be saving for your down payment for five years, divide your goal by five.  This number is the amount you will need to save each year to reach your goal.  Next, divide the annual amount by 12.  This is the amount to save each month to reach your goal.  You may figure out that the amount you need to save each month to reach your goal is a challenge, but this may help you to figure extra ways to save.

Create a separate savings account

Set up a separate savings account for your down payment goal, and contribute regularly to this account.    Putting the funds aside in a separate account will make it more difficult to “dip” into the savings for other expenses.  You may also wish to set up an automatic transfer to your down payment savings account.

Put your savings to work

If you have a longer timeframe before you will need to access your down payment funds for a home purchase, you have several options to put the money to work for you while you wait.  Rather than a savings account earning less than 1% interest, consider a certificate of deposit (CD), or a high-yield savings or money market account for your down payment funds.

Finding extra money

Review your budget and expenses to see if you can find any additional money to put towards your down payment savings.  Do you go out to lunch every day at work?  Can you bring a lunch to work a couple days a week instead?  Do you stop at your local coffee shop every morning? At $3 per drink, or $15 per week, this can add up quickly.  Can you find any possible savings on your cable bill?

Other possible ways to accelerate your savings rate are to work overtime if you have the option to work additional hours, or to temporarily take on a second job.  Is there a market in your community for the skills you already possess?

You may also like to check the California Mortgage Resource Directory complied by the California Associate of Realtors to see if you qualify for any mortgage assistance programs offered in your area.

Working on a budget and adhering to your plan is essential to your ability to purchase your own home.  Review your budget with an open mind and you will be pleasantly surprised at how quickly you can save a sizable amount of money towards your goal.