If you’re serious about buying a home, you’ve probably already looked at different home mortgage loans and may have an idea of the size of down payment you will need. Although nearly every online mortgage calculator starts out with a 20% down payment, it’s not essential for you to save this much money. You may be able to qualify for a down payment assistance program that can cover all or part of the down payment. FHA loans can require you to pay as little as 3.5% down, while if you’re a qualified veteran, you can buy a house with no money down through the VA home mortgage program.
Let’s look at a more general situation, however. If you want to buy a $500,000 house, do you really need to put $100,000 down, and pay for all your moving costs? Probably not — but let’s say you do — how long should it take for you to save $100,000?
As to saving for a down payment on a house, you shouldn’t mix your down payment savings in with your emergency funds. Some financial advisers counsel that you should have at least six months in emergency funds, in case you fall ill, lose your job, or have another unexpected financial setback.
Once you’ve selected a goal for your down payment savings, let’s say $100,000, you’ll need to establish a plan. What could you use to start the account? A lot of people have plans for their tax refund. So, let’s say you’ll get a $5,000 tax refund this year. Only $95,000 to go, right?
Get the best interest rate you can find
The average bank or credit union savings account paid only .8% interest in 2019, according to Bankrate. You’ll want to find another savings alternative. Look for a savings or investment product that will pay at least 2% interest. Some programs require you to have a minimum deposit, but if you’ve got $5,000 to start the account, this should qualify you for most interest-earning savings accounts.
If you start your down payment savings plan with $5,000 from your tax refund and put $1,500 a month in your savings account, after 60 months (5 years), you’ll have contributed a total of $90,000 to the account and earned over $5,048 in interest for a total of $100,048.
If this sounds “un-doable,” ask yourself if there is any way you can free up $1,000 to $1,500 a month for savings. This is how people build financial security and move beyond living “paycheck to paycheck.”
Obviously, if you can find savings or investment plans that will pay more than 2% interest, or you can afford to save more than $1,500 a month, you’ll have your down payment in less than five years. You may want to investigate robo-advisers or alternative savings plans. Just keep in mind that if your savings are in uninsured brokerage accounts, you can lose money. Balance safety with potential earnings for your best plan to save money for a down payment.