Buying a home typically requires some up-front planning. You’ll most likely need to do your research to find the right home for your budget and the best loan for you. You might need to take some steps to improve your credit score and save for a down payment. Remember—the best loans with the lowest interest rates tend to go to people with steady incomes, great credit scores and a down payment of 20% of the home’s purchase price.
Here’s a typical scenario: Catherine wants to purchase a home priced at $250,000, so a 20% down payment would be $50,000. That’s a lot of money.
Catherine might be able to buy with less than 20% down, but that means her interest rate will likely be higher, adding thousands—even tens of thousands—to the total cost of the loan. She also may be required to buy private mortgage insurance, which protects the lender should she fall behind on your payments. The cost of mortgage insurance can add several hundred dollars to your monthly housing expense.
That’s a significant expense. But Catherine—and you—shouldn’t give up hope. It’s possible to get to that 20% with discipline and careful planning. Here are some ideas to consider.
Figure out how much home you can afford. This can depend on your income, your expenses and your current debts. If you currently rent, the amount you pay each month will give you a rough sense of how much you can pay for a mortgage. (Remember that once you own a home, you’ll also have to pay for maintenance and repairs, property taxes, and homeowner insurance.) Since your goal will be to save enough for a down payment, take 20% of the cost of the home you can afford, and that will be your savings goal.
A budget can help you see how much money comes in, how much goes out, and what’s left over. Make it realistic—look at your actual bills and paychecks. If you just guess, you could underestimate how much you spend and how much you can save.
Pay off any higher-interest debt that you can. If possible, consider consolidating your higher-interest debt with a low-interest loan or transferring your balance from a credit card with high interest to a credit card with a lower interest rate. Once your debt is paid off, that money can start going toward your savings. What’s more, most lenders won’t even consider you for a loan unless your total debt is below a certain percentage of your income.
Take five of your big monthly bills—for example, heating and cooling, cable, and cell phone. You could talk to friends and family, go online, or work with the service providers to learn whether you can reduce any or all of these bills.
Buying things is so easy. All it takes is a swipe of a card, a click of a mouse, or a tap on a screen. Consider taking a “cooling off” period before you purchase anything other than basic staples. If you’re tempted to buy something, wait anywhere from a few hours to a few days before opening your wallet.
Consider opening a Marcus savings account just for your down payment. In our example, Catherine chose an online savings account with a higher-than-average rate, and she set up automatic monthly deposits into that account. She scheduled the deposits to occur immediately after her paycheck is deposited into her primary checking account so she doesn’t spend the money before she can save it. If you receive your paychecks via direct deposit, you can usually direct a portion of your paycheck to a savings account.
Even if you don’t make it to the magic 20%, reducing your debt and accumulating a decent-sized down payment may help you get approved for a loan and could help you quality for a lower interest rate. With some money set aside, you should be in a better position to buy and maintain your new home.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.
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