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ACU of Texas Blog

Start Saving Money to Buy A Home

Posted on April 19, 2018

Buying a home is an important step in the lives of many people, and the process of buying a home starts long before house hunting begins! Step One – is to actually start saving for a down payment, which we know can seem like a pretty overwhelming task, as it takes time and patience to accomplish. Here are a few basics on how to start saving your down payment:

How Much Down Payment Do I Need?

While it is pretty common for lenders to request at least 20% down on a home, the good news is that there are plenty of programs that allow you to put much less down, especially if you are a first time homebuyers.

For example, an FHA loan (Federal Housing Administration) loan offers a 3.5% down payment through participating lenders. FHA loans are usually easier to qualify for and have slightly lower rates than conventional mortgage loans. Applying this to a $200,000 home loan, a 3.5% down payment on an FHA mortgage loan would be $7,000 as opposed to $40,000.

The best way to know how  much down payment you need is to meet with one of our mortgage specialists to discuss your options, like how much house you can afford, what your monthly payment may look like, and of course your down payment. Once you know how much down payment you need, you can start to build a savings plan to reach your goal.

Why are Down Payments Important?

Down payments are important because they create "equity." Your home is one of your most valuable assets, and helps to create wealth. For example, let's say you do put $40,000 down on a $200,000 loan. Your mortgage balance becomes $160,000, so you're making monthly payments on $160,000 as opposed to $200,000, and you automatically have $40,000 of equity in your home.

Let's assume that in two years, you sell your home. Your mortgage balance is now $150,000, and you sell your home for $220,000, because home values increased. Which means your $150,000 mortgage balance is paid off, and you walk away with $70,000! That is cash that can be saved, invested, used to pay off debt, or used as a down payment on your next home.

Can I Buy a Home With Less Than a 20% Down Payment?

Yes, you can still buy a home with less than 20% down. It just means that you will likely be required to purchase mortgage insurance. Mortgage insurance is protection for your lender (not you) in case you default on your loan. It will be an additional charge you pay either at the closing of your mortgage or it will be added to your monthly mortgage payment. The only way to avoid this charge is typically with a 20% down payment.  

Quick Tips to Save for a Down Payment on a Home

Set up automatic transfers from your checking account to your savings account using Online Bill Pay. This way the money is automatically deposited into your savings, and you didn't have to lift a finger.

Save your spare change and bills. This may seem a little weird, however, you'd be amazed at how quickly this adds up. Use a jar, a pail, a bucket, and every time you have spare change or bills, drop it in and forget about it.

Save your raise. When you get a raise, take the amount of the increase and put that directly to savings. You were doing just fine with your finances before the increase, right?

Set aside extra cash like bonuses and tax refunds. When you receive a bonus or a tax refund, put them directly into your savings account. After all, you didn't have this money to begin with.

Refinance existing loans. Do you have a vehicle loan or a personal loan, maybe some credit card debt? Consider refinancing or debt consolidation to lower your monthly payments. Take those monthly savings and put them into your savings account.

How to Maximize Your Down Payment Savings

Once you know how much of a down payment you need, consider how you will maximize the money you are saving for your down payment. There are several options besides a normal savings account to keep your house fund growing quickly.

  • money market account typically pays higher interest rates than a regular savings account and you can still easily add more money at anytime. 
  • Certificates of Deposits typically pay higher rates than savings accounts and money markets. Certificate terms generally range from 3 to 60 months, so you can choose the term that works for you. There are early withdrawal penalties for certificates, so its important that you choose the correct term.

Final Thoughts on Saving for a Down Payment on a House

Saving for a house can be easier than you think. The key is to create a plan that has actionable steps and stick with it. With a little time, patience, and planning you'll have that 20% down payment for buying a home before you know it. 

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