Saving For a Down Payment? Here's What You Need To Know
It takes a lot of hard work to save up the tens of thousands of dollars necessary to make a sizable down payment on a home. Are you prepared for that process?
If you're thinking of buying a house, you likely have at least some understanding of the financial odyssey that awaits you. In addition to the ups and downs of applying for a mortgage, shopping for a home, placing bids and so on, you'll also need to save tens of thousands of dollars for your down payment.
As with many other things in the realm of real estate, there are a lot of misconceptions out there. For first-time buyers, that can certainly include the ins and outs of saving for a down payment.
How much do you need?
Experts generally recommend that you make a sizable down payment of 20% or more, but that isn't a hard and fast rule. Some people may be able to qualify for loans that require down payments of as little as 3% of the purchase price, which obviously represents a sizable difference in savings for you.
Saving for years to purchase a house is no small feat, but you can make simple moves to help you get there more quickly.
However, as Nerdwallet points out, that just means you will probably have to pay for what is known as private mortgage insurance until you have paid off up to 20% of the property's value. Plus, you're likely to pay a lot more in interest over the life of the loan — meaning that the money you "save" up front with a smaller down payment ends up costing you far more down the line.
As such, you'll need to weigh the pros and cons of buying now versus later, when home prices might be higher and thus require an even larger down payment.
How will you build your savings?
Saving for your down payment, especially when you are just starting out, it can seem daunting. Being able to find $100 here and $50 there every month may not seem like it's going to make a dent. Investopedia notes that you should certainly plan to be able to buy a home sometime down the road , not in the immediate future.
Fear not: The benefit of crunching the numbers on your monthly expenditures and finding a few ways to save here and there can add up quickly. Just make sure you find a way to set a sensible budget and work diligently to stick with it until you have as much as you think you'll need to buy in your desired market.
Where will you put that money?
While you're saving, you might also be thinking about how to silo that money off from your everyday funds. If you already have a savings account that's separate from your checking, and which you rarely if ever touch, that might be a good idea, but if you can open a high-yield savings account with an even higher interest rate, that can be a great option as well, The Motley Fool says.
Buying a home is likely to be one of the biggest financial decisions of your life and you should go into that process with as much information as possible. When you get in touch with the local representatives at Vectra Bank, we can walk you through all your options and help you make the right decision for you.
The information contained herein may not represent the views and opinions of Vectra Bank a division of Zions Bancorporation, N.A. It is presented for general informational purposes only and does not constitute tax, legal or business advice.