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5 Steps to Save Up For a House Down Payment

Step 1: Determine how much you will need to save.

Find out how much of a mortgage you can qualify for by talking to a mortgage lender. Your housing expense should not exceed 28% of your stable monthly income.

For example, if your income is $4,500/month, you can safely allocate $1,260 of that to your down payment savings. The $1,260 will include mortgage principal and interest, real estate taxes, homeowners insurance, and homeowners association (HOA) dues(if any), private mortgage insurance (PMI).

With mortgage rates at about 4.25% this will translate into a mortgage loan amount of about $250,000. The mortgage rate will be based on your credit score, loan program term, debt-to-income ratio and more.

To get the best-priced mortgage deals, you generally want to make a 20% down payment. It’s not a requirement, but that is the ideal. For a 20% down payment on a $250,000 home, you are looking at a $50,000 down payment.


Step 2: Decide on when exactly you want to buy a home.

When do you want to buy a home? If you decide you want to buy a home in 3 years from now, you will need to be prepared to save approximately $16,667 per year. That comes out to $1,389 per month. That’s a big chunk for anyone to put aside. You will need to consider cutting out the larger expenses from your budget or finding a way to make more income. You can do the calculation for 5 years or more to save and it may be more realistic for you.


Step 3: Take a look at your current budget and make room for savings.

The best way to look at your budget is to create an Excel spreadsheet and type in your income amount at top, list each expense in that column and subtract from your monthly income. This will give you a bottom figure- hopefully showing some money leftover, or breaking at 0.

If you don’t have any money leftover, you will need to take a look at the items that aren’t a necessity- such as eating out all the time, leisurely activities, etc. Take a look at the services you are using for your phone, internet, insurance, etc. and see if you can find a more affordable service elsewhere to cut costs.

Addressing the larger expense items is what will really help you save. If you have a huge car payment, maybe take a look at finding a lower car payment, or even making a one-time payment on a used car. That way, you are freeing up some of your income to set aside in savings.


Step 4: Find the best way to save, while also growing your savings at the same time.

Talk to an experienced financial advisor who can advise you on low-risk, long-term savings accounts that grows over time. It would be a real shame to let this amount of money sit in a regular bank savings account without any growth.

If you aren’t already in touch with a good financial advisor, ask your family members and friends for recommendations. You can also look into different companies online, such as Vanguard, T. Rowe Price, etc. and they can advise you on the right type of investment accounts.


Step 5: Set up an automated savings plan.

The best way to save money is to set up an automated system. Allocate a percentage or amount that will automatically come out of your paycheck each period and transfer into your savings account or money market account (the same way it would with a 401K contribution).

This way, you don’t see the money and therefore it’s invisible to you. There won’t be the temptation to spend it, because it won’t be in your regular bank account, ready to spend.

Saving for a home is a long process, but well worth the discipline. You will be grateful in the long run to have that bigger down payment because your monthly mortgage payment won’t be so outrageous that you feel you are drowning. Think of this as a dry run for getting you in the routine of saving, because once you are a homeowner, there will be unexpected expenses and repairs related to the house itself.

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