Are you tired of schlepping boxes from rental to rental? Perhaps you have way too much stuff overflowing your small space? Whatever the reason may be, you’re ready to go from renter to owner, and are considering how to save for a down payment.
Homeownership can be a daunting idea, but not an impossible goal. As long as you get serious about planning, saving, and investing, you can be on the road to settling down at a permanent address.
So, whether you need to store your mounting collection of keepsakes, want a large yard for your growing family, or desire the closet space your wardrobe deserves, here are some tricks on how to buy your first home.
Do Your Home Buying Research
“Saving for a down payment has always been the No. 1 challenge for home buyers,” said Tracey Shell, a spokeswoman for DownPaymentResource.com, a website that serves mostly younger renters sorting through the about 2,500 available financial assistance programs to buy their first home.
The average American house costs around $232,500, according to the National Association of Realtors, and of course can go much higher, so saving a down payment could take years without assistance.
“Sixteen thousand people complete a search for programs on our website each month,” Shell said. “It really pays for home buyers to do their research because they really have to figure out what is a fit for them and their market.”
Eric Rosenberg, a finance specialist with a blog called Personal Profitability, recommends starting the process by finding a home you want.
“Start with the end in mind and then work backwards to see how to get there,” Rosenberg said. “Some people get sticker shock depending where they are in the country.”
Once you know the price range for a home that has all your ‘Must Haves,’ make a budget to calculate what you need to do to save the recommended 20 percent of the home’s purchase price for the down payment.
Although 20 percent isn’t always necessary.
“A lot of people think you have to save 20 percent for a down payment, but there’s even options for 3 percent or lower,” Shell said. “Depending on location, household characteristics – how many people, their income, if they’re a public servant like a firefighter, police officer or teacher. Those are characteristics that can open more opportunities for a home buyer.”
When you have an address or general neighborhood where you are looking, you can plug it into DownPaymentResource.com and see what programs are available to help you with a down payment, first mortgage or closing costs.
If the phrase ‘closing costs’ just confused you, consider signing up for a homeownership class, which will help you understand the home purchasing process.
“Do the classes early on so you can learn things like what escrow is, why you shouldn’t take out an additional credit card in the middle of your home buying process, how debt factors in,” Shell said. “They also provide information about homeownership repairs, like how long your water heater will last you and the life cycles of other appliances.”
There are online classes, like the ones on eHomeAmerica.org, in case you have a busy schedule.
Start Saving As Early As Possible
Once you’ve done your research, you will have an idea of how much money you will need in the bank to make a move.
The easiest and most effective way to save money is to have it automatically transferred from your paycheck into a savings account, Rosenberg said.
“Automating is the best way to save, because you’re taking it out of your hands and letting your bank take it for you,” said Rosenberg, who recommends paying 20 percent of the home’s cost as a down payment to avoid paying for mortgage insurance from your lender.
“If you own less than 20 percent equity in your home, the bank will require you to pay for insurance in case you stop paying your mortgage,” Rosenberg said. “You might be able to find a bank that will sell you a home for 5 or 10 percent down, but then you’ll have an extra payment every month.”
Rosenberg recommends renters open savings accounts and doing research for the highest interest rate possible. He found Ally and CapitalOne360 currently offer easy-to-use accounts with some of the lowest rates.*
“You want it to be easy, but you want the highest interest rate as possible,” he said.
Rosenberg warned to save what you can without having to max out your plastic.
“You don’t want to be forced into a situation where you are in more debt because you’re saving,” Rosenberg said. “But the more dollars you save and put down, the lower your mortgage payment.”
It will also help if you throw any work bonuses into your savings account and that fat tax-return check instead of spending it on shoes and big-screen TVs. Resist the urge!
Invest Wisely to Increase Your Down-Payment Savings*
You may get a better return on your money if you invest instead, blogger Rosenberg said. Low-rate index funds are one way to get started investing, he added. They can give potential homebuyers low-cost access to many stocks at once without a high-priced Wall Street manager, which can increase fees, he said. In addition, the average actively managed fund underperforms the average index fund, according to annual S.&P. Dow Jones studies.
Rosenberg warns against being reactionary.
“The people who invest consistently do better than people who try to time it,” he said.
It’s important to remember to be realistic no matter where you are in the saving process.
“Just save up and buy a house that you can afford, even if it’s not your dream house,” Rosenberg said. “If you buy smart, the value of the home will go up, then you can sell it and buy a bigger home with the equity.”
And stay motivated while pinching your pennies by thinking about all the storage space that awaits you in your new home!
Infographic courtesy of DownPaymentResource.com
*This blog is for information and illustrative purposes only. It is not, and should not be regarded as, investment advice or as a recommendation regarding any particular security or course of action. Public Storage does not purport to and does not, in any fashion, provide tax, accounting, actuarial, recordkeeping, legal, broker/dealer or any related services. You may not rely on the statements contained herein. Public Storage shall not have any liability for any damages of any kind whatsoever relating to this material. You should consult your advisors with respect to these areas.