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Jun 24, 2024

How to save for a down payment: practical strategies for future homeowners

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Two illustrated hands with one holding a piggy bank and the other holding a small house

When you’re planning to buy a home, your down payment is likely your biggest expense. For first-time homebuyers, it’s often the largest amount of money they’ve ever planned to save up, and it can seem pretty intimidating. But there are ways to make it feel more attainable. Understanding how down payments work and adopting effective saving strategies can empower you to set a realistic goal and achieve it. 

Here’s what we’ll cover:

What is a down payment and how much is it?

Most people take out a mortgage loan when buying a house. But generally speaking, a bank won’t loan you the full purchase price; you’ll need to put down some of the cost upfront. That’s what a down payment is: an initial payment you make when purchasing a home. Your down payment will be a percentage of the total purchase price, and it’s typically paid in cash at the closing of the transaction. 

Lenders require a down payment to reduce the risk of lending money. By making an initial investment in the property, buyers demonstrate their financial stability and commitment to the purchase. Additionally, a down payment affects mortgage terms and monthly payments. Larger down payments generally result in lower monthly mortgage payments and better interest rates, which can make mortgage payments more affordable in the long run.

Typical down payment percentages

You may have heard the common advice to put down 20% of the purchase price when buying a home. That’s not realistic for a lot of people, but luckily, it’s not usually required. Down payment percentages can vary widely depending on the loan type and the buyer’s financial situation. Common down payment percentages range from 3% to 20%, with conventional loans from a bank typically requiring a down payment of 5% to 20%. Your credit score, income, debt, and other aspects of your finances affect how large of a down payment a lender will require.

There are also government programs that help people purchase a home with a low down payment. Many first-time homebuyers can qualify for an FHA loan, which can require as little as 3.5%. And there are specific programs for veterans and low-income buyers in rural areas that require zero down payment for people who qualify. 

How much should you save for a down payment?

When calculating how much to save for a house, determining how much to save for a down payment is a crucial step, as it represents a large portion of the money you’ll need. You’ll want to figure out the price point of your ideal home and decide what percentage you want to put down.

Determining your ideal home price

First, you’ll need to know the price range for the kind of house you plan to buy. You can look at this from a couple angles:

  • The mortgage payment: You might want to determine how much you can afford to spend on a monthly mortgage payment, then use an online calculator to find out the price point of homes you can afford based on that. Then you can browse real estate listings to see what kind of houses fall into your price range and consider whether they’ll meet your needs.  
  • Your needs and desires for a house: There are multiple factors to consider when choosing a home, and they all affect the list price: things like location, size, and the home’s age and condition. You could decide on what matters most to you in a house and look at listings that line up with that to get a sense of what those sorts of houses cost.   

Often, people find that there’s a disconnect between what they can afford and what they think of as their dream home. But that doesn’t have to leave you discouraged. Decide what trade-offs you’re willing to make by separating your must-have home features from the nice-to-haves. That can help you zero in on a price range for your first house that aligns with your budget.

Calculating your down payment amount

Once you have an idea of your ideal home price, you can calculate the down payment amount needed. Simply multiply the home’s list price by the percent you want to put down to get the dollar amount you’ll need to save for a down payment. Here are a couple examples:

  • If you plan to buy a home priced at $250,000 and aim for a 10% down payment, you would need $25,000. (250,000 x 0.10)
  • For a $400,000 home with a 20% down payment, you would need $80,000. (400,000 x 0.20)
  • To buy a $300,000 home with a 5% down payment, you’d need to save up $15,000. (300,000 x 0.05)

While a low down payment might help you buy a house faster, making a larger down payment can provide significant benefits, such as lower interest rates, reduced mortgage insurance premiums, and increased home equity from the start. So when you’re deciding how much to save for a down payment, you’ll want to weigh the benefits of buying a home sooner with the downsides of potentially higher mortgage payments. 

Effective ways to save for a down payment

Saving for a down payment requires a combination of discipline, strategy, and smart financial planning. Here are some effective ways to reach your savings goal.

Create a dedicated savings account

Having a separate account for your down payment savings can help you stay organized and focused. A dedicated savings account allows you to track your progress and avoid the temptation to use your funds for other expenses. Consider opening a high-yield savings account or a money market account to earn interest on your savings. These accounts typically offer higher interest rates than regular savings accounts, helping your money grow faster.

Trim non-essential expenses

Reducing discretionary spending is a practical way to boost your savings. Identify non-essential expenses that you can curtail, such as subscription services, dining out, or entertainment. Implement cost-saving strategies in your daily routine, like meal planning, using coupons, and reducing energy consumption. With some creative thinking and discipline, you can find many ways to save money, which can add up over time and significantly contribute to your down payment fund.

Increase your income

When you’re coming up with ideas for how to save for a down payment, you might want to look for opportunities to make more money that you can put directly into your house fund. You might consider part-time jobs, freelance opportunities, or side hustles that align with your skills and interests. And if you come into a windfall like a tax refund or bonus at work, don’t spend it; use the money to boost your savings and reach your down payment target faster.

Earn interest and returns on your savings

When your money earns money, your savings grow faster. Put your down payment savings into low-risk short-term savings and investment vehicles where you can earn interest and returns. In addition to high-yield savings accounts and money market accounts, you might consider options like certificates of deposit (CDs) and I bonds, which provide higher interest rates in exchange for keeping your money invested for a set term.

Down payment assistance programs

If saving for a down payment seems out of reach, there may be ways to make it more affordable. Various programs can provide financial assistance to homebuyers who qualify.

Federal and state programs

Federal programs, such as FHA loans (designed for people who might not qualify for a conventional mortgage), VA loans (for veterans and service members), and USDA loans (for low-income residents in rural areas), offer low down payment options and favorable terms for eligible buyers. Many states also have specific programs designed to help first-time homebuyers with grants, loans, or tax incentives. Research available programs in your state to find the best options for your situation.

Employer assistance programs

Some employers offer down payment assistance programs as part of their benefits package. These programs provide financial support to employees purchasing a home. Companies like Google, Bank of America, and others have implemented such programs to attract and retain talent. Inquire with your HR department to see if your employer offers any down payment assistance benefits.

How to budget for a down payment

A budget is a fundamental tool for managing your finances and creating a savings plan. If you’re serious about saving for a down payment, now’s the time to start budgeting.

Track your expenses

Understanding where your money goes is the first step in budgeting. Use tools like budgeting apps, spreadsheets, or online banking features to track your daily, weekly, and monthly expenses. Categorize your spending to identify areas where you can cut back and allocate more funds toward your savings goal.

Create a monthly budget

Set up a realistic budget that prioritizes your down payment savings. Allocate a specific amount each month toward your savings goal. As you create your budget, you might want to make adjustments to your spending habits so you can prioritize saving. For example, you may decide that you’d rather cook at home most nights instead of ordering delivery because buying your first home will be even sweeter than that takeout food.

Pay off high-interest debt

If you’re carrying balances on credit cards or have a personal loan, there’s a chance that the interest charges you’re racking up could be more than the interest you’re earning on your savings. You may be well-served to make a plan to get out of high-interest debt as soon as you can. Once your debt is paid off, you can put the money you’ve been spending on payments into your down payment savings fund. 

Adjust your budget over time

Regularly review and adjust your budget to accommodate changes in income or expenses. Stay flexible and adapt to any unexpected financial situations. Consistently monitoring and updating your budget can ensure you remain committed to your savings plan.

Staying on track with your savings plan

A down payment is likely to be a large goal with a long timeline. Maintaining motivation and staying focused on your savings goal is crucial for success.

Automate your savings

Setting up automatic transfers to your savings account can simplify the saving process and help ensure you stick with your plans. Schedule automatic transfers from your checking account to your down payment savings account based on when you get paid. If your employer offers direct deposit, you can also ask them to put a portion of your paycheck directly into your savings account to make saving even easier.

Set milestones and celebrate every small win

Break down your savings goal into smaller, manageable milestones. Celebrate your progress along the way with small rewards or experiences. Recognizing your achievements will keep you motivated and committed to reaching your ultimate goal.

Share your goals and achievements

It can be tough to save up if you feel like you’re going it alone. Some people have embraced loud budgeting as a way to keep themselves accountable and tap into the power of community. This might be an appealing way to share your goals and successes with other people who can cheer you on.  

Visualize your future home

Keeping your goal in sight can be a powerful motivator. Use techniques like vision boards or visiting open houses to visualize your future home. Regularly remind yourself of the benefits and joys of homeownership to stay inspired.

How to save for a down payment: get started and keep going

Saving for a down payment is a significant step toward homeownership, and with the right strategies and mindset, it can be achievable. Even if the goal seems far away or you don’t think you can save much money right now, the sooner you start, the more time your money will have to grow.

Understanding how down payments work, setting realistic goals, and adopting effective saving methods can make the process smoother and more manageable. With consistency, commitment, and discipline, you’ll be well on your way to unlocking the front door of your first home of your own. 

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Written by

Tara Blaine

Tara Blaine draws on over 20 years of experience as a writer to translate seemingly complex financial ideas into insights readers can put to work in their everyday lives. She’s written personal finance education materials for numerous institutions, helping customers learn smart techniques for budgeting, overcoming debt, saving money, and planning for their long-term financial health.


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