Saving for a down payment when you’re simultaneously trying to pay rent, make car payments, and pay down student loans is no easy task—even if you’re making your dream salary. As housing markets get more and more competitive, the cost of down payments has been slipping up, up, and away.
Case in point, say you live in Los Angeles. If you were to put down 20% on a two-bedroom condo for $600,000, that would mean coming up with $120,000 in cash. Again, no easy feat when you’ve got other bills to pay.
Is 20% still the norm when it comes to down payments? For those of us wondering how to afford a down payment, there may be good news: The minimum down payment on a house can be as little as 3.5% if, for example, you qualify for an FHA loan.
You may even be able to buy a home with no money down, in some rare instances. But typically, this is only an option if you are eligible for home loans through the Veterans Association, or if you qualify for a USDA home loan for low-to-moderate income families purchasing homes in rural areas.
In 2019, The National Association of REALTORS® found that the average down payment on a house is only 12% . On the other hand, there are still benefits to putting down a full 20%. You don’t typically have to pay private mortgage insurance, and a 20% down payment may help get you a manageable mortgage payment.
Smart Ways to Save Up for a Down Payment
If you’re saving for a down payment, whether it’s a 5% or a 20% down payment, here are nine ways to save for your dream home.
1. Snowflake Savings Method
The snowflake method is a debt payoff method that involves you putting any extra cash you have, no matter how small, toward your debt. You can use it as a debt payoff method while you save for a house, simply because it’s typically easier to save for a down payment when you have less debt.
But you can also use the snowflake method as a savings method by throwing as much money as you can toward your down payment savings. Essentially, saving with the snowflake method means putting any extra cash away for a down payment.
Birthday check from your great aunt? It goes into savings. Made $300 from selling old textbooks on eBay? Put it in your down payment fund.
2. Asking for a Raise
Of course, you can’t walk into your boss’s office and demand a raise because home prices are rising in your area. Don’t get us wrong, in an ideal world, we’d all be able to do that, but it’s just not realistic.
Instead, start thinking about when the last time you got a raise was, and whether you’re honestly due for one. Talk to your manager about steps you need to take to qualify for a raise, and then get to work on those action items.
This can be more of a slow play, but it can also have a big payoff if you get a substantial raise. When you get a raise, you may want to avoid scaling up your lifestyle. Instead, you can use some or all of the extra take-home pay for your down payment savings.
3. Starting A Side Hustle
If boosting your income at your current job isn’t an option, you can still increase your take-home pay by taking matters into your own hands. You could start side hustling in the evenings or on weekends. Side hustles aren’t all about glamour—it’s not all travel blogging and doing sponsored Instagram posts.
Sometimes it just means getting a side job at your local coffee shop, or being a dog walker. Who knows, if you’re a good enough dog walker, it might ultimately lead to Instagram fame. The point is, choose a side hustle that works for you, so you can redirect that cash into your “house fund.” (More on that in a moment.)
4. Asking For Contributions To Your “House Fund” At Your Wedding
If you’re getting married, and hoping to buy property afterward, you can consider asking for donations to a “house fund” instead of registering for things to fill your potential house. And there’s no rule that says you can’t register for some nice sheets and a cast iron skillet while also offering a house fund as an option.
Guests at your wedding want to invest in your future—that’s why they’re at your wedding in the first place. Showing them that you’d like to use their gift toward starting a home for your new family can be meaningful to your guests, and to you and your spouse.
5. Lowering the Cost Of Your Student Loans
Making huge student loan payments each month certainly isn’t helping you set aside cash for your future home. But at the same time, aggressively paying down your student loan debt can help you as a homeowner in the long run. However, if the end of your student loan debt tunnel isn’t in close sight, there are ways to reduce the amount you pay toward student loans every month, in order to set aside some funds for a future downpayment.
One popular option – you can refinance your student loans at a potentially lower interest rate. Alternatively, you could lengthen the repayment timeline for your student loans when you refinance, which can help lower the amount you pay every month to free up some cash. One note of caution: if you have federal student loans, refinancing means you’re forfeiting certain benefits and protections offered by the federal government, like loan forgiveness programs and deferment options, so consider this option carefully.
Qualifying for a lower interest rate when you refinance, even if you keep the same terms and don’t extend your repayment timeline, should save you over the life of your loan and, possibly, even a little bit off your monthly payment. If you’re already making every extra dollar count via the Snowflake Method, you could use even a few extra dollars here and there to contribute more to your down payment savings.
6. Paying Off Credit Card Debt
Putting more money toward your credit card debt might seem counterintuitive if you’re trying to save for a house. But think about it this way: Credit card debt is widely regarded as the costliest debt, because interest rates on credit cards are so high compared to other forms of consumer debt.
If you can wipe your credit card debt out, it could free up some cash to help boost your savings in the long run. Perhaps you could focus on paying it down aggressively for several months, then once you’re done, you can redirect the money you were putting toward your credit card debt toward your savings.
One way to speed up your credit card debt payoff is with a loan with a lower interest rate or more attractive, fixed term. Commonly called credit card loans, these are essentially just unsecured personal loans that may offer more agreeable terms than your credit card accounts.
Similar to refinancing a student loan, an unsecured personal loan may give you the option to pay off your existing high-interest debt using a new loan, and then making payments on the new loan over a fixed period of time at, hopefully, a lower interest rate. . By doing so, you may be able to not only get out of your debt faster, but also allocate cash into your savings each month once the debt has been repaid.
7. Using a CD
A certificate of deposit (CD) is an investment with the potential to gain interest. Although not risk free, the benefit of a CD is the interest rate is set when you invest. While you might not earn as much on your money as you would if you adopted an aggressive investment strategy, you’re also not subject to as much risk. Although, factoring in the inflation rate, the cash you invested may not be as valuable when you take it out as when you first invested it, so that’s something to keep in mind as well.
One other drawback to a CD is that you may not be allowed to withdraw your money early. So if your dream house comes along a year before your money can be taken out of a CD, it might be hard to access that cash.
8. Asking Your Family Members for a Loan
Asking family for money is never fun, but there’s also no shame in gathering cash so you can build up a better down payment.
In a competitive housing market, putting down a bigger down payment might be the difference between locking in your dream house, or looking for another three months.
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