Saving for a House – The Down Payment

by Sean Bryant on June 26, 2012

Once I graduated college and had a good start on an emergency fund, the next thing on my to-do list was to start saving for a house. Five or ten years ago it was possible to get a mortgage with little or no down payment. Those days are long gone and for good reason. Too many people were being given mortgages that they had no business owning. Their monthly payments were either too much for their income or they didn’t have nearly enough collateral to support the loan.

Because lenders are much more cautious with who they lend money to now, it is important to have at least a 10 percent down payment and having 20 percent would be even better. One of the big benefits to having 20 percent or more is that you won’t be forced to pay private mortgage insurance, which can add another $100-$200 per month to your mortgage payment. Below you will find a few steps that will help you start saving for a house.

Figure Out How Much Money You Need

The first thing you need to figure out is how much money you need to save. You need to decide how much you can afford each month. This includes principle, interest, taxes and any association fees you might have. After that, you will know exactly how much house you can afford based on the size of down payment you want to use.

Decide When You Want to Buy

Now that you know exactly how much you need to save, you need to decide when you want to purchase your house. By setting a goal for when you want to have this money saved up by it will give you something to work towards. Too often when people fail to set goals they get sidetracked by something else and it ends up taking even longer.

Set up a Separate Bank Account & Make Deposits Automatic

Once you start saving for your down payment you will want to open a separate bank account. This will allow you to keep your down payment separate from your checking account and other investments. I use high yield online savings accounts such as ING Direct or Ally Bank. Another great option would be an account with Discover Bank.  Once you have your new savings account set up, you need to start making deposits automatic. If you have the money transferred into the account automatically each month you won’t have the opportunity to spend it on other things.

First Time Homebuyers Should Max out Their IRA

If you are a first time homebuyer you are allowed to withdrawal up to $10,000 without paying the 10 percent early withdrawal fee. Because you will typically earn a return with your IRA over a savings account you will want to fully max out your IRA account each year.

If you follow these steps and start to cut out any useless spending than you will be well on your way to saving up to buy your dream home.

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Sean Bryant

Sean Bryant created OneSmartDollar.com in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and he wife are avid world travelers. He enjoys spending time with his daughter Colette and dog Charlie.
  • http://twitter.com/SenseofCents Michelle

    Definitely save as much as you can so that you can avoid PMI! That’s something I failed at.

  • http://www.mymoneydesign.com/ MyMoneyDesign

    Saving for a down payment was pretty tough, but its a must if you want a place to call your own. I did the same as you by opening a whole different account and keeping that money out of sight and out of mind. Interesting strategy using your IRA to build that up and apply towards the payment.

  • http://www.fromshoppingtosaving.com/ From Shopping to Saving

    I like the IRA idea, but I think I will keep my contributions in there for retirement. I have 25% down for a condo here but I am still waiting until I am done with school to make the plunge.

  • http://www.moneylifeandmore.com/ Lance@MoneyLife&More

    A higher interest rate with your IRA? What are you investing in in the Roth IRA that pays an interest rate? You’ll never be able to put those contributions that you take out back in either as I understand it. I’d save your down payment in a savings account or invest it in an investment account but using your Roth IRA contributions is an option but not optimal in my opinion.

    • http://www.onesmartdollar.com/ Sean @ One Smart Dollar

      That should have said return. Thank you for catching that.

      Let’s say you are in your 20’2 and you have $10,000+ in an IRA but have not started saving for a home. With record low interest rates buying a home now is probably something you might want to do. Since your 40 years away from retirement $10,000 isn’t going to be much to make up in your IRA.

      Just my personal opinion that it’s an OPTION to a home buying

      • http://www.moneylifeandmore.com/ Lance@MoneyLife&More

        Thanks for the clarification. Makes more sense now :) I agree it is an option and that is was makes personal finance great! So many options!

  • http://savvyfinanciallatina.wordpress.com/ Savvyfinanciallatina

    Great article!

  • http://cashforsilverusa.com/blog Rob

    When you were saving for your down payment, were you also renting? How much were you able to put aside per month?

  • http://mycanuckbuck.com/ Mycanuckbuck

    These are all great ideas – the more you can save (and in a separate account, so you aren’t tempted to touch it!), the better. In Canada, we can take money out of our RRSPs to use towards our first down payment. I’ve finally finished putting all the money I took out back in!

  • Jason @ WorkSaveLive

    I think the IRA is an option for people but most use that as a fall-back plan because they’ve been unable to save anywhere else.

    I’d hope people try to save it outside of the IRA and only use those funds as an absolute last resort. Despite being young and realizing they could afford to take out $10k from those accounts, the biggest factor in compound interest is TIME and therefore losing it isn’t something I’d always encourage people to do.

  • http://www.cbc-international.co.uk/ CBC International

    Im currently 19 years of age and I’m already saving for my first house, and have been since I was 18. When I got my first credit card, in order to earn a good credit score.
    I’ve set up a separate bank account which is topped up each month by direct debit so im not tempted to spend any of it!

    It’s never too early to start saving, especially when you have no idea whats round the corner in this economical climate.

    Michael

  • http://twitter.com/seedebtrun See Debt Run

    Definitely a good idea to save at least 20% if at all possible. That PMI is just maddening!
    -M

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