How To Save Money for a Home Without (Too Much) Sacrificing
Lucy: I know how you feel about all this Christmas business, getting depressed and all that. It happens to me every year. I never get what I really want. I always get a lot of stupid toys or a bicycle or clothes or something like that.
Charlie: What is it you want? Lucy: Real estate.
—A Charlie Brown Christmas
When you’re wondering how to save money for a home, it can start to feel as if you’ll never scrape together enough for a down payment.
Yeah, you already know that Rome wasn’t built in a day. Well, the same holds true for building a down payment. It takes time!
Still, as long as you grease the gears early (like now), you’ll barely notice you’re saving until—boom!—one day in the foreseeable future, you’ll be sitting on a pile of money that could pave the way to homeownership.
Sound good? Good. Here’s how to get started.
Trim those unnecessary expenses
OK, let’s shift those preconceived notions. Contrary to popular belief, the answer to how to save money for a home isn’t mostly about grueling sacrifices—like holing up in your apartment under a bare lightbulb, eating ramen, and piggybacking off your neighbors’ Wi-Fi. “It’s about a lifestyle change,” says Travis Sickle, a financial adviser with Sickle Hunter Financial Advisors in Tampa, FL. A more sustainable strategy, he says, is to pinpoint your silent money siphons. Odds are, you could try some of the following cost-cutting measures without feeling the pinch:
● Replace your $250 monthly cable service with a $13.99 Netflix standard streaming account, and you’ll save $2,832.12 per year.
● Cut that languishing gym membership—at $50 per month, you’d save $600 a year. Instead, sign up for online fitness classes or apps, or head out for a walk or run.
● Packing lunch will save you about $245 a month—or $2,940 a year.
● Bike to work. For a 10-mile commute, biking can save you around $5 a day, according to Kiplinger, the personal finance forecaster—or $1,250 a year.
● Do you crank up the heat when it’s cold out? As a general rule, turning down your thermostat just three degrees could shave almost 10% off your electrical bill, netting you $20 a month on a $200 bill, or $240 a year. Of course, this will vary by area and whether you need heat year-round, but consider it no- brainer savings to snuggle up at home in a sweater. Or, during hotter months when you turn on the air conditioning, consider keeping your space cool but not frigid, for similar savings.
● Curb those dinners and drinks out at restaurants, which can quickly add up. If you typically shell out $40 three times a week, reduce that to one evening a week, and you’ll save $80
—or $4,160 per year. (Bonus: It’ll make those times you do indulge more special!)
And if you and your significant other team up and try all of the above, that would amount to roughly $10,000 per person, or $20,000 in only one year. Just remember that when you’re thinking of ordering a third glass of artisanal craft beer.
You can also get some apps that make saving easy. For instance, Truebill will help you identify all the subscriptions you’re paying for, so you can decide what you want to keep—and ditch (then they’ll cancel the subscription on your behalf). Or, wherever you shop online, an app like Honey will scan the web for coupons and apply them at checkout.
Open a dedicated account
If you don’t have a savings account, now’s the time to open one. A checking account is great for daily expenses, but when it comes to saving money—well, they don’t call them savings accounts for nothing. You’ll earn interest on your balance, plus there’s a lot to be said for the mental benefit of having a specific place to stash your down payment. While interest rates haven’t been very impressive in recent years, it’s still great to have a dedicated account where you can see how you’re progressing toward your goal.
As an alternative, CDs and money market accounts offer higher gains than savings. You’ll need a larger minimum balance than for a regular savings account, but your goal is to make it grow, not shrink, right? If you’re using a CD, just make sure you don’t withdraw the money before the time is up, or you’ll face some stiff penalties.
4 crucial questions to ask your partner before buying a home together
B “How much debt do you have?”
If you haven‘t done so already, now is the time for each of you to come clean about any debt you may have, since that can make or break your ability to get approved for
a mortgage.
B “How big a mortgage are we comfortable with?”
Though your debts and income will determine your ability to qualify for a mortgage, only you and your partner can decide how much you
feel comfortable spending on a home. If you stretch yourselves too thin, making your mortgage payments can be difficult.
B “Where do we want to live and for how long?”
Buying a home makes sense only if you’re planning to stay put for a while. Therefore, have a talk with your partner about your long–term plans. Do you see yourselves starting a family in this home? Are you both happy in your current jobs, or do you foresee a job search in the future that could make for a longer commute?
Life throws curveballs, of course, but discussing these things ahead of time will help you decide whether you’re really ready to buy a home together based on your future goals.
B “What happens if we decide to stop living together?”
Although this is a happy time in your relationship, you will need to consider all possible outcomes in the future and to create a plan-ideally a formal contract-for how you would divide your assets if you split up. This is true whether you’re buying a home with your spouse, partner, family members, or friends. All the parties should seek independent counsel from an attorney and a tax professional, to walk them through both the legal process and the tax ramifications of purchasing a
shared property.
Automate your savings
If you’re struggling to put enough money away because of the constant temptation to blow your paycheck, consider automating the process. Ask your employer if you can have your paycheck deposited into multiple accounts—if so, instruct it to send a certain percentage of your salary directly into your savings account. Or go through your bank, setting up automatic withdrawals from your checking to a savings account that will help force you to keep your spending in check.
Consider tapping into your retirement funds
Most 401(k) plans allow you to borrow up to 50% of the vested balance, or up to $50,000, to buy a home—and it takes about a week. But borrowing means you have to pay back the funds, with interest, or face a penalty of 10%. Your plan provider will usually set the terms, as well as the loan limit, which is typically five years.
Digging into your IRA usually carries the same 10% penalty of breaking open your 401(k) piggy bank, with one major difference: The penalty doesn’t apply to first-time homebuyers. And unlike a 401(k), you don’t have to repay what you take out of an IRA. However, the withdrawal is still taxable. Plus there’s the matter of not repaying yourself, which can hurt your retirement in the long term. So if you take out a sizable chunk, restoring this nest egg to its former level could take you many years.
Check out down payment assistance programs
Depending on the city and state you live in, you may be eligible for down payment assistance programs, which provide money to help people buy a home. Most offer up to $15,000, typically in the form of a grant or low-interest loan, and require that your income be lower than the area’s median. But even if you make more, do your research—there are programs that provide funds for higher-income households.
If saving up for a down payment is a challenge for you, keep in mind that you don’t always need to save 20% for a down payment. With certain kinds of loans, you can get away with a down payment of as low as 3.5% (for FHA loans) or even 0% (U.S. Departments of Agriculture or Veterans Affairs loans). Tap me, Steve your agent, as I have several programs I can introduce you to.
Can Mom and Dad pitch in on the down payment?
You bet! Many first-time homebuyers get financial help from their parents to make the down payment. Just keep in mind that the money they give should be a gift—i.e., with no obligation to pay your parents back. The reason: If a lender suspects that the money might be a loan, repaying said loan will be factored into your mortgage approval amount, and you’ll qualify for less than you might have wanted.
In order to prove it’s a gift, you may need to provide your lender a signed letter stating that the money is indeed a gift, not a loan that must be repaid at a later date. Different lenders have slightly different rules on what they require, so be sure to check with them first.
There’s also a limit to how much someone can give you as a gift—free of federal gift taxes, at least. Under the 2022 tax rules, each person giving can give up to $16,000 without incurring a tax obligation. The good news? It’s $16,000 per year per donor, so Mom and Dad could in theory give you a total of $32,000. Also, the federal gift tax generally is owed by the donor (e.g., Mom and Dad, in this case) not the recipient of the gift. Note that there could be state tax rules to consider also. As with any financial transaction, check with a qualified tax adviser regarding tax matters.
