How to Save for a Home

Buying your first home requires planning since it’s probably going to be one of your biggest purchases in life. A good first step is to determine the right kind of house that would suit you and your budget. Once you have an idea of what you’re looking for, you can start saving for a down payment.

The size of your down payment depends, in part, on the type of loan you’re able to secure. While the traditional recommendation is to put 20% down, in reality, the average down payment for first-time homebuyers is around 8% according to the National Association of Realtors. Some lenders may even offer conventional loans with down payments anywhere between 3% to 5%.

Of course, the more you can put down, the better: You won’t have to borrow as much and you’ll likely get a better mortgage rate, which usually means a lower monthly payment.  

For many first-time homebuyers, the down payment will likely be the most significant expense they have to plan and save for. While the numbers may seem daunting, it is possible to reach your goal with discipline and careful planning. Here are five ideas to consider.

1. Set a savings goal

Before you start saving for a down payment, you’ll need to consider how much home you can afford. Take a look at your income, expenses, and debts and be realistic about the budget you have to work with.

If you currently rent, the amount you pay each month could give you a rough idea of how much you can pay for a mortgage. There are also affordability calculators online that could help you crunch the numbers. Another option is to work with a financial advisor or mortgage expert to get a better sense of what would be a reasonable down payment for your financial situation.

While your down payment is a good starting target for your savings goal, you may want to factor in other costs associated with the homebuying process, such as closing costs, taxes, insurance, and moving costs.

2. Create a savings plan

Once you have a number in mind, you can put together a savings plan with a specific timeline to help you reach your goal.

Let’s say, for example, that you’re looking to save $120,000 in the next five years for your down payment and other homebuying costs. That means you’d have to save $2,000 every month for five years ($120,000/60 months = $2,000 per month).

Here it’s important to be realistic and ask yourself whether it’s possible for you to achieve your goal within your desired timeframe. If you can’t set aside $2,000 every month, you’ll have to make some adjustments – maybe that means extending your timeline or revisiting the question of how much home you can actually afford. You may even want to explore ways to increase your income to help you hit your savings target.

3. Understand your savings account options

No matter what you’re trying to save up for, it’s important to understand the different types of savings vehicles that are available and choose the right ones that can help you reach your goal.

For example, high-yield savings accounts and certificates of deposit can be a great place to put your money to work for short-term goals, as these accounts typically offer higher APYs than a traditional saving account.

When shopping for a savings account, think about your needs. What’s your timeline and how much flexibility do you need when it comes to accessing your cash? You may come to find that you can use a combination of different savings accounts and strategies to help you save for your first home.

Learn more: Guide to Savings Accounts

4. Check your spending

One way to bump up your savings is to see if there are any expenses you could cut back. Of course, this is not to say you have to give up on things you enjoy, but rather, it’s good to get into the habit of reviewing your spending regularly to see where you might be able to find opportunities to save.

For instance, are there recurring purchases or subscriptions you could cut back on or even eliminate? Consider going over certain essential expenses too, such as car or home insurance, and see if there are steps you could take to help lower your premiums.

Any extra dollars you find in your budget can be reallocated toward your savings. A few dollars here and there may not seem like much at first, but over time, they can really add up and get you closer to your goal.

Learn more: Tips to Help Reduce Daily and Recurring Expenses

5. Pay down debt and maintain good credit

Saving for a goal can feel especially challenging when you’re also trying to pay down debt. It’s important to stay on top of your payments: The quicker you’re able to pay off your debt, the sooner you can free up those dollars and put them towards your savings goal.

Managing your debt responsibly could also help you build a solid credit history, which will matter when you apply for a mortgage. Good credit can improve your chances of securing a loan because it’s a sign to lenders that you’re financially responsible and creditworthy. Typically, people who have high credit scores tend to enjoy better loan terms. This could mean lower interest rates or lower down payments.

Learn more: Credit Score Guide