4 Simple Strategies for Coming Up with Your First Down Payment

by Jessica Sommerfield · 13 comments

your-home
Buying a home is often seen as an important rite of passage to ‘adulthood’ and a major part of the American dream. Depending on your situation and where you live, it can also be cheaper than renting. But, unless you have a large chunk of money just sitting around, the down payment it requires is a big obstacle. As higher costs of living continue to shrink our net income, it can be a real struggle to save that recommended 20%, especially if you’re a first-time homebuyer with few assets. Thankfully, there are plenty of assistance and low-down-payment options out there if you really need them, but there’s also a unique sense of accomplishment if you can do it on your own! Here are some simple strategies for saving up for your first down payment.

1. Open a Dedicated Savings or Investment Account and Automate It

Separating your down payment fund from your other savings accounts will make it easier to calculate its progress. You can simply create a new savings account with your current bank for ease of transfer, but it’s also a good opportunity to open up a high-yield savings account online that may offer better interest rates than your bank. Money market accounts and funds are also low-risk ways to earn more for your dollar. If you have a year or more to save, CDs offer even higher interest rates.

Next, set up your direct deposit or bank account to automatically transfer a certain amount from each paycheck (ideally based on your projected savings goal and timeframe – like a sinking fund). Even if you can’t afford to set aside much, consistency leads to accumulation.

2. Get Ruthless with Your Net Income

After savings and retirement contributions are deducted, your bills are paid, and your consumables are purchased, what’s left? What are you spending it on? Can you live without any of those things for a while? Being ruthless as you slash your discretionary spending is hard, but it’s also one of the easiest ways to ‘find’ money to apply to your down payment.

If you’re a two-income household, see if you can tighten up your finances enough to live off of one income for a while and bank the second. I know it’s not easy, but it’s also much more possible than many people think, especially since we tend to inflate our lifestyles to match our income.

3. Throw Every Windfall and Spare Dime at It

Tax refunds, monetary gifts, bonuses, cash-back rewards cards, even that annual raise – every time you find yourself with “extra” money, put it toward your down payment. I’m using this strategy right now for a different savings goal, and it’s encouraging how much it tends to focus your anticipation and help you stay disciplined. Pretty soon, you’ll be looking for extra money, which leads to the next strategy.

If it’s too hard to save larger chunks of money, save your “change.” Although there’s no shame in raiding the couch cushions or the console of your car, you can still apply the concept of “spare change” to your automated finances. Enroll bank programs and apps that automatically round up debit transactions to the nearest whole dollar, transferring the difference into your designated savings account. You could also adopt the popular $5 rule – every time you get this (or another chosen amount) in change, it goes toward your down payment fund.

4. Liquidate, But Don’t Rob Yourself

Carefully consider liquidating stocks, bonds, CDs or other non-cash assets if you own them. Notice I didn’t mention retirement accounts. As tempting (and allowable) as it is, borrowing from your future security could turn into robbing from yourself. It’s just not worth the risk.

There’s no way around it: saving money for a down payment takes planning, sacrifice, and time, but the reward will be worth the effort.

For those of you who’ve already been there, what are some other creative ways you’ve found to save up for that mountainous down payment?

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  • Ryan G says:

    Also, I stress this… plan to save 20% plus an extra $5K-$10K for closing costs (depending on the costs of property taxes and insurance in your area). Also, save another $5K for costs associated with the move and setting up your new home. It costs more money than you anticipate when you buy a house vs renting a house or apartment. Things you have to buy or budget for that you haven’t in the past, and these add up. It will mean that it will take you more time to save, but it will be worth it.

    If you put less than 20% down, you will be stuck paying PMI until you’ve built at least 22% equity in the house, which can take quite a few years. PMI isn’t super expensive, but can easily add $50-$100 per month to your mortgage payment. You can deduct it from your income taxes, but it is better to just not pay it.

    As far as these savings strategies go, they are all good advice. Easiest way to save money is in a way where you won’t miss the money once it is gone. Moving in to a new place is a good time to de-clutter, so consider having a garage sale. My wife had one before our last move and we sold a TON of stuff. We didn’t make much money on any given item, but in the aggregate we made about $1000 over the course of a couple of days selling old clothes and other stuff we didn’t want to take with us on our move. I sold much of my media collection (CDs, DVDs, video games) and netted several hundred dollars (separate of the garage sale). If you are in apartment, see if a friend or family member will let you use their garage for the sale for a day or two… they may want to join you.

    • Ryan G says:

      Another benefit of putting 20% down (at least) besides not paying PMI… You can choose not to escrow your property taxes and insurance! We are purchasing a house right now, and I talked to the bank about not escrowing. Of course the bank wants everyone to escrow as you are essentially giving them a year long interest fee loan, and they know that there will be money to insure the home and pay the taxes each year. But, many (all?) banks will let you forgo the escrow if you put at least 20% down. Our bank is charging us an additional 0.5 discount points to secure the rate with no escrow option, which isn’t much in the grand scheme. Our mortgage payment will be exactly the same every month we have the loan until it is paid, which is nice. It also allows me to save and manage the escrow money myself. Self-escrow isn’t for everyone… make sure you are disciplined enough for it, but it is good to have the option.

      • David Ning says:

        Not adding property taxes and home insurance also let’s you control the taxes since you can bunch deductions one year and then take the standard deduction the next.

        I’m surprise you have to pay a half point extra on your mortgage for the privilege though.

        • Ryan G says:

          So in your example, if your property taxes are due at the end of the year but you can pay them as late as January 31st (for example), then you could pay last years property taxes in January, and the current year’s taxes in December and have a much larger deduction. Neat idea!
          The downside is that you will effectively lose the mortgage interest tax benefit in the off year, along with your other itemizations that year. This strategy would be highly dependent on the individual filer’s situation. However, all things being equal, claiming the tax benefit earlier rather than later is the way to go.

        • Ryan G says:

          OK, so I just did the math, and again I think this is highly dependent on the individual situation, but lets take an example of a married couple filing jointly. The standard deduction for this couple is ~$12K per year. Let’s say this couple owned a home and had to pay $6K per year in property taxes and $9K per year in mortgage interest. Let’s also say that these numbers held approximately constant over the course of 4 years, and that the couple didn’t have any other significant deductions to itemize in the off years.
          If the couple itemized each year, they would beat the standard deduction by $3K per year for a total of $12K over 4 years ((6+9-12)*4 = 12).
          If the couple paid year 1 & 2 taxes in year 2, and year 3 & 4 taxes in year 4, and took the standard deduction in the off years, they would beat the standard deduction by a total of $18K over 4 years ((6+6+9 – 12)*2 = 18).
          So, over 4 years, you can deduct an extra $6K on your taxes. If you were in the 25% bracket, this is equivalent to $1500. Not a ton of money, but definitely worth going after.
          It would also simplify the process of filing every other year if you don’t have to itemize.

          • David Ning says:

            And plus, interests paid on the mortgage generally goes down because you are paying down the principal through time, so this maneuver is worth looking into, especially for those who have no or low state taxes.

    • David Ning says:

      Selling the clutter is a great way to get some money but also remind us that we spent way too much to get some temporary satisfaction. And if people think it’s too much of a hassle to sell those things, then they might end up buying less in the future.

  • Latoya | says:

    Awesome tips! If I could do it all over again, I would definitely save up much more for our down payment.

    • Ryan G says:

      Once you have a home picked out, or at least a price range set, you only have two ways to control your monthly mortgage payment… first is interest rate. The second is your down payment. You can always pre-pay your mortgage by paying extra each month, or making larger one-off payments, but none of these reduce your monthly mortgage… pre-paying will allow you to pay the loan off sooner, but the payments don’t change. A larger down payment reduces the amount of the loan and total interest repaid, and you only get one shot unless you refinance.

      • MoneyNing says:

        Good tips Ryan. You can technically reduce your monthly payment once you start paying down your principal over and above what the amortization schedule dictates by asking for a loan recast. Not every servicer allows one but you can look into this.

    • David Ning says:

      Saving more always means a better financial future. And it’s not too late to reap the rewards! Start saving more today!

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