Rising house prices and high interest rates have made it harder than ever for people to save enough to buy their own home. While saving up for a down payment may seem intimidating, a solid savings plan can set you on the right track. Not only is saving your down payment doable, but there are many resources to help you achieve your goals. Keep reading for actionable tips on saving for your first home.
How to Save For Your First Home
The first step to saving for your first home is to come up with financial goals. Goals should fit the SMART acronym. This means your goal should be specific, measurable, attainable, relevant and time-bound. If you want to learn more tips to set financial goals, check out our blog, How To Set Financial Goals and Achieve Them.
1. Assess Your Financial Situation
Before setting a financial goal, you should understand your expenses and current income. DCU’s calculators can help you determine both of these to help you set your goal accurately.
It’s also important to understand your credit score. You’ll have multiple credit scores but the most relevant are the VantageScore and FICO scores. If you’re interested in learning more about understanding your credit score, read our article about the subject.
One of the most critical aspects of evaluating your financial situation is knowing how much debt you already owe. Addressing higher interest obligations such as credit card debt can give your credit score a boost and free up your finances to allow you to save more money. DCU has multiple tools to help you get your debt under control and help you start saving.
2. Set Realistic Homeownership Goals
Wondering how much to save for your first house? Everyone’s dream home is different. While the open floor plan, finished basement, and three-car garage might be what they’re pushing on TV, it might not be what will make you happy. The best house for you is one that won’t keep you up at night with a looming mortgage payment. Here are a few financial factors you may want to calculate into your first-time home-buying expenses.
● The 30% rule: The general rule of housing payments is to keep your mortgage payments under 30% of your income. However, it’s important to factor property tax and other housing expenses such as possible HOA fees into this amount.
● Closing Costs: There are fees that are rolled into buying a home beyond the price you agree to pay for it. Closing costs, including appraisal, lawyer, title fees and more can end up costing you 3% of your loan amount, making this often-overlooked expense quite significant to new homeowners.
● Reserves: Some lenders will also check to make sure you’re not wiping out your bank account by buying a new home and will ask for reserves. They’ll simply check to see if you still have a certain amount of money in your account. This amount will still stay in your coffers but it’s a number you may want to factor into your budget.
● Moving: Finally, the costs of moving aren’t to be overlooked. While some realtors may offer free moving trucks, hiring pros to help you move may cost upwards of $1,500.
3. Develop a Comprehensive Savings Plan
If you’re ready to start saving for your down payment, you’ll want to develop a comprehensive savings plan, taking your income, expenses, and your debt into account. Once you know your expenses, you’ll know what percentage of your income you can regularly put into savings to meet your financial goals.
Keeping a dedicated account for saving for a house ensures that you’ll know exactly how much money you have set aside for your down payment. Accounts such as these often offer automatic transfers to make putting money aside on a regular basis simple.
4. Explore Government Assistance Programs
There are many resources available to help people invest in their own homes. For instance, first-time home buyer programs can help those with lower incomes and credit scores get loans. Some people want to know, “do first-time home buyers need down payments?”. First-time home buyers often only put down a down payment of 10% or less while the typical down payment is 20%.
There are also programs to assist veterans, law enforcement officers and teachers with their down payments. Look into these government programs to see if there’s a program that best applies to you. Programs may change according to your profession, income bracket, location and more.
Once in their home, first-time home buyers can benefit from tax incentives. Look into your state benefits to see if buying a home can earn you tax credits. First-time home buyers may also be able to withdraw money from their IRA for housing expenses without incurring the 10% early withdrawal penalty. However, this should be done with caution as this money will still be taxed.
5. Choosing the Best Savings Account for First Home Buyers
Choosing the right savings vehicle for your assets will help you reach your financial goals sooner. While we’re all familiar with the standard savings account, the APY most standard accounts offer don’t keep up with inflation rates, making them less than optimal for long-term savings. Here’s a comparison of three choices with a higher APY than a standard savings account.
● High-Yield Savings Accounts: High-yield accounts an APY that can compete with inflation rates while also offering accessibility so that it’s easy to contribute and withdraw assets from the account. There’s typically no minimum deposit requirement to open a high-yield account.
● Certificates Accounts: Certificates are another way of saving money at a higher APY. However, the assets deposited into a certificate will be unavailable throughout the savings term. Many certificates can offer a higher APY than a high-yield savings account, making it a good option for those who don’t need to keep their accounts liquid and want to make more compound interest. Certificates typically do have a minimum investment starting at around $500.
● Money Market Accounts: The higher the balance in your money market account, the better APY your account will earn. The money market accounts at DCU are insured and a great option for those with a higher account balance.
6. Consider Investment Strategies
When you’re putting money away, you’re typically investing to ensure that it keeps up with inflation. Putting your hard-earned money into stocks and bonds can be unsettling at first, but it’s important to diversify your portfolio so it can withstand the ups and downs of the economy.
When you’re investing for the short term for something such as a down payment, you’ll want a lower-risk option that has a high enough interest rate to overcome the effects of inflation. While some certificates and high-yield savings accounts can do this, researching stocks, bonds and mutual funds may produce higher dividends than safer options.
Getting the timing right when saving for a house can be critical. Before putting your money into the market, seek guidance from a financial advisor. They can help you tailor your financial decisions to your specific needs. DCU offers education and guidance to all its members. Learn more about becoming a member to get help with important financial decisions such as these.
7. Trim Unnecessary Expenses
Believe it or not, this part can be a little fun. Once you know you’re saving for a first home, making little sacrifices makes more sense. At this point, you know your expenses and income. Go through your expenses and cut down on discretionary spending.
There are all sorts of small things you can do to tighten your budget - like cutting back on streaming services, meal prepping, and more. Tightening your budget can become a bit of a hobby — once you’ve trimmed the unnecessary expenses, you’re ready to create a sensible budget and stick to it.
Finally, don’t keep your new lifestyle a secret. Proudly proclaim it to the world so that your friends and family will understand where you’re coming from and support you in your fiscal journey. All your scrimping and saving will seem worth it every time you transfer money to your account or check in to watch your down payment grow.
A Home Worth Saving For
Saving for your first house is an exciting journey. It’s a journey that it’s important to plan for. What savings accounts will you use to save money? What grants or tax breaks can you utilize to achieve your goals? Don’t forget to reach out to get pre-approved for a mortgage loan so that you’re ready when you find that perfect house.
Financial institutions like credit unions can offer great interest rates on savings accounts and home loans. Learn how an institution like DCU can help you in your home-buying journey. With calculators, educational resources and financial guidance, DCU is always looking out for their members.
Please note, membership is required to open a DCU savings account or mortgage loan. Visit our membership eligibility page for more information.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
