Buying a house is one of the biggest financial decisions most of us have to make.
But how do you save money for a house?
Saving for a home can seem like a daunting experience!
Where do you even start?
Don’t worry, with our 12 steps, you can easily build up a savings fund to put a down payment on a new home.
What will I learn?
How to Save Money for Buying a House
Here’s how you can save money to buy a house:
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- Step 1: Make a Budget
- Step 2: Cut Out Non-Essential Expenses
- Step 3: Curb Spending
- Step 4: Pay Debts Before Purchasing a House
- Step 5: Set Up an Emergency Fund
- Step 6: Calculate How Much You Can Afford to Pay Monthly
- Step 7: Determine Your Total Mortgage Amount
- Step 8: Save 10% to 20% for the Down Payment
- Step 9: Save for Other Costs
- Step 10: Give Yourself a Timeframe for Saving
- Step 11: Know Where to Keep Your Money While Saving for a House
- Step 12: Pick Up a Side Gig to Earn More Money
This is the gist of it.
We’ll guide you through the process and we’ll let you know:
- How to calculate an exact monthly mortgage payment amount that you can afford, based on your income.
- Tips on how to spend less and cut your expenses, so you can save for a home faster.
- Tips on how and where to save your money.
- Exactly how much money you need for a house deposit/down payment.
- How to get yourself into a better financial situation before you start saving.
- And more!
Read on for details and tips on how to take each step correctly so you can save fast, easy and without starving yourself!
Step 1: Make a Budget
Making a budget, especially with so many great free apps for budgeting, is a simple step but a lot of us tend to overlook it.
Here’s the thing…
Keeping everything in your head just won’t work!
Take 20 minutes and create your first budget if you haven’t already.
Write down your income, and your spouse’s, if applicable.
Then go through your accounts for the last few months and write down all of your expenses.
Don’t just include your utility bills or car payments.
Include every transaction, from your coffee before work to online purchases.
This gives you a better idea of how much of your income you are spending each month.
Once you’ve done this, you’ll see how much cash you have left over.
If it’s not much, then there are a couple of things that you can do.
Step 2: Cut Out Non-Essential Expenses
If after your expenses are deducted from your paycheck you aren’t left with much money, then you’ll need to clear some room in your budget.
A good way to do this is to cancel some subscriptions and services that aren’t essential. If you are wondering how to save money for a house while renting, then this is a good thing to do, because it helps you to free up some of your cash.
Obviously, you can’t avoid paying for electric!
But there are other services that you can cut out.
Here are a few:
Cancel the Cable
You could save more than $55 a month by cancelling cable, and switching to a streaming service like Netflix.
Switch to a Low-Cost or Free Cell Phone Plan
Consider switching to a cheaper cell phone plan. Or you could even get one for free. FreedomPop, for example offers free cell phone plans. You could save $148 a month.
Cancel Your Gym Membership
You could work out at home instead and save yourself $648 a year!
Cancel Unwanted Subscriptions
There’s a tool called Trim that will find and cancel unwanted subscriptions for you. It could save you $120 a year! Check out our review of Trim here.
Step 3: Curb Spending
Another way to make room in your budget is to curb your spending.
There are a few ways that you can do this:
Eat At Home Instead
According to federal data, the price of food at home decreased, but restaurant prices increased by an average of 2.7%.
So, eating at home instead could save you a lot of money.
Even if you spend just $10 on lunch each workday, that’s still $50 a week, around $200 a month, and $2,400 a year!
When you add it up, you can see that you’re spending a pretty substantial amount each year. Bring your lunch to work instead.
Or even just cut lunch spending in half.
Always Use a Shopping List
Never go to the store without a shopping list. According to studies, when you take a shopping list with you to the store, you spend less!
This is because having a list means you’re less likely to spend money on impulse purchases.
And with so many great free money saving shopping apps that let you create shopping lists easily and on the go, you have no excuse not to do it.
Don’t Buy Sale Items Just for the Sake of It
When trying to save money getting stuff at a discount is great but only if you actually need the stuff!
If you buy a $50 item that’s on sale for $30 and you didn’t really need the item, then that’s $30 spent rather than $20 saved.
You’ll save more money by not buying the item at all.
Don’t buy an item just because it’s on sale. Of course, if you were planning on buying something and it goes on sale, then definitely take advantage of the saving.
Use Cash Instead of Cards
Take the exact amount of cash you plan to spend with you when you go to the store and leave your credit and debit cards at home.
When you have to physically part with cash, it makes you more aware of how much you’re spending. Plus, when you only have a set amount of cash with you, even if you are tempted to buy extra stuff, you won’t be able to, as you don’t have any cards with you.
Delete Credit Card Information from Online Stores
This is one of the best online shopping hacks to save money. Do not store your card information on online stores.
When your credit or debit card numbers are saved on a website, you can make a purchase with just a few clicks.
If you are trying to save money, then you want to avoid anything that makes spending easier.
So delete your credit card information from retailer’s websites.
Having to actually enter your card details gives you more time to consider a purchase, and think about how spending will impact your saving goal.
This is a simple tip that will stop you spending as much cash.
Don’t Use Credit Cards
According to studies, people spend up to 100% more with a credit card than they do when they use cash!
If you want to have more money to put towards a house you should avoid using credit cards.
They encourage overspending and get you into debt.
With a credit card, it’s easy to buy an item and worry about paying for it next month when your paycheck comes in, but then you may not have the cash to clear your balance and you’ll get into debt.
And you don’t need more debt on top of your mortgage.
When You Do Spend Money, Be Smart About It
If you do need to buy stuff, make sure that you get the best deals on your purchases.
Compare prices, and shop through cashback websites.
With cashback websites like Ebates, TopCashBack and Mr. Rebates, you can save up to 40% on everything you purchase!
Comparing prices on everything you purchase also ensures that you get the best deals on the stuff that you do by, and it reduces the amount you spend.
There are tools out there that you can use to compare prices too. View our list of best price comparison apps.
With Gasbuddy, a gas price comparison app, for example, you can save $340 or more a year.
Comparing prices and using cashback websites can save you money that you can put into your home fund.
If you’re wondering how to save money after buying a house these are good tips to keep in mind too!
Step 4: Pay Debts Before Purchasing a House
If you have money tied up in debts, like credit cards, student loans or car payments, then it limits the amount of money you can put toward a mortgage.
So, consider paying down some of your debt first. Not only will this put you in a better financial situation, but it will also free up hundreds or even thousands of dollars to put towards your down payment.
And this allows you to save for a house faster.
Plus, paying down debt can boost your credit score, and lower our debt-to-income ratio – and since these are important factors that lenders consider when deciding whether you qualify for a loan, paying off debt can actually improve your chances of getting a mortgage.
Step 5: Set Up an Emergency Fund
While having a savings goal is great, life happens and there are unforeseen costs that arise. These could be major car repairs, vet bills, or uncovered medical expenses.
This is why it’s important to have an emergency fund.
Then, when an unforeseen expense does arise, you’ll have some cash to cover it, and it won’t affect your goal of saving for a home too much.
Before you start saving for a down payment, we’d recommend setting up an emergency fund.
Step 6: Calculate How Much You Can Afford to Pay Monthly
Once you have your budget figured out, you need to determine how much you can afford to pay on your mortgage each month.
While everyone’s financial situation is different, as a rule of thumb, you should spend no more than 25% of your monthly take-home pay on your mortgage payment.
This is because you don’t want too much of your income tied up in mortgage payments.
If more than 25% of your income goes toward paying your mortgage payment, you’re going to leave yourself short on cash to pay for other expenses.
Here’s an example to illustrate:
Let’s say that you earn $3,700 a month.
In your case, you would have $925 a month to put towards mortgage payment. Bear in mind that this number needs to include other costs, like escrow, homeowner association fees, insurance, and taxes.
So take your income, and your spouse’s, if applicable, and then take 25% percent of that, and that’s how much you can afford to pay for your mortgage payment.
An easy way to do this is to just multiply your income by .25.
Then, you’ll have your monthly mortgage amount.
Step 7: Determine Your Total Mortgage Amount
Once you know the amount you have to spend on your mortgage each month, you need to use this monthly mortgage payment figure to work out a total mortgage amount.
Now, for this, we’d recommend using a mortgage calculator.
This just makes the process a little easier.
Dave Ramsey’s Mortgage Calculator is a good one (you can use it here), and we’re going to use it for our examples below. But feel free to use any mortgage calculator that you want to.
With this calculator, you can select which type of mortgage you want, including
- 15-year fixed rate
- 30-year fixed rate
- 5/1 adjustable rate mortgage (ARM)
It’s really up to you which type of mortgage you choose.
Obviously, a 15-year fixed rate mortgage will save you thousands of dollars compared to the traditional 30-year option.
So, if you can go with a 15-year fixed rate mortgage.
Of course, this just isn’t possible for everyone.
So choose the option from the dropdown menu that best suits you.
You can enter numbers and see what house you can afford.
Let’s say that you have $1,500 to put towards mortgage payments.
With a set interests rate of 3.66% (which is what the calculator is set to), then, you could afford a home with a value of $210,000 with a 20% down payment.
This would cost $1,477 a month.
Going back to the example above, where the person’s income was $3,700 a month, it would leave $925 for monthly mortgage payments.
In this case, you would have to go with a lower-value home.
You can get a $127,000 home on a 15-year fixed mortgage with a 20% down payment, and at an interest rate of 3.66%.
Or, you could get a home with a higher value, but you would have to pay it off over a longer period.
For example, you could get a $175,000 home on a 30-year fixed rate mortgage with a 20% down payment, and at an interest rate of 3.66%, and your monthly mortgage payment would be $926.
Also, the amount of money you pay in the down payment will also affect how much you pay each month.
Paying 20% will make your monthly mortgage payment less than if you paid just 10%, and 30% would reduce the monthly payment even more, and so on.
It’s really up to you which type of mortgage and home value you want to go with.
Input different numbers into the mortgage calculator until you get your ideal monthly payment that you figured out previously.
So, like we said above, if you earned $3,777, then you’d have $925 a month for mortgage payments. So enter numbers until you come up with a monthly payment that matches this.
Step 8: Save 10% to 20% for the Down Payment
Wondering how much money should you save to buy a house?
This is a common question that people have when saving up for a new home.
It’s a good idea to save between 10% and 20% of the home’s value for your down payment.
If you can, try to save 20% because it could lower your interest rate, open up opportunities for a 15-year mortgage, and also help you to avoid private mortgage insurance (PMI)
Let’s say that you are going to purchase a home for $150,000
Then you would need to save $30,000 for your down payment.
This is your saving goal.
Step 9: Save for Other Costs
It’s not just the down payment that you need to save for.
Banks also require you to pay for other fees.
It’s really important to save for these items too.
Here are some other costs to consider when saving for a down payment:
Private Mortgage Insurance (PMI)
This is a fee that’s added on to your monthly mortgage. It’s added if you put down less than 20% on your home.
This fee varies. Generally speaking though, PMI will increase your monthly payment by around $50 for every $100,000 spent on a home.
Appraisal And Inspection Fees
You will need to get your future home appraised and inspected in order to get the lender to sign off on your mortgage.
On average, each of these costs around $300.
Occasionally, the seller may agree to cover closing costs, but don’t depend on it. If the seller does agree to pay the closing costs, you then have some extra cash leftover when you move to your new home, which is great!
Getting the mortgage signed off takes a lot of work, and you’ll need to pay closing fees.
These are usually between 2% and 5% of the total mortgage value.
Be sure to add all of the costs above onto your down payment.
This will give you your full savings goal.
Let’s say that your down payment is $30,000, and all of the costs above total around $6,000.
Then your initial savings goal would be $36,000.
Step 10: Give Yourself a Timeframe for Saving
Now that you have your savings goal – we know it takes a lot of calculations! – it’s time to set a timeframe.
Decide on when you plan to purchase a home.
Then, take your savings goal and divide it by the number of years you plan to save for.
For example, if you plan to purchase a home in five years, and your savings goal is $36,000, then you’d need to save $7,200 a year and $600 a month.
$36,000 seems like a lot, but breaking your goal down makes it seem more realistic.
We’d recommend not giving yourself too lofty a goal.
Trying to save $2,000 a month when you only have $1,000 left over after bills is obviously not a great plan.
Figure out a timeframe that works for you and fits in with your budget.
Step 11: Know Where to Keep Your Money While Saving for a House
A common question people have when saving for a home is, “where should I keep my money while saving for a house?”
It’s a good idea to open up a separate account to store your savings.
If your savings are in with your regular account, then the temptation to spend the cash is there.
So, set up another account.
And, consider automating the savings process as well. Set up payments to be taken from your paycheck, just as you would with a utility bill.
Then, you don’t even have to think about saving money, as the money moves from your paycheck to your dedicated savings account automatically.
Step 12: Pick Up a Side Gig to Earn More Money
If you’ve been wondering how to save for a down payment on a house fast, then consider picking up a side gig.
This is especially great for people who wanna save money for a house in 6 months or so. You have to increase your income simultaneously while decreasing your spending.
You could get extra cash to put into your down payment savings fund.
Plus, it’s also a good idea to pick up some extra work if your budget is tight.
If after looking at your budget, you find that your income is similar to your expenses, even after you’ve cut back, then you may need to increase your income.
If your bills alone are close to your income, even without recreational spending, then it’s going to be tough to save for a house.
This is where side gigs can be good.
You can pick up a side gig and put the extra cash into your home savings fund.
Here are some examples of what you could earn:
- Doing data entry work online could earn you an extra $440 a month, working just 10 hours a week.
- Driving for Amazon Flex, which pays you from $18 to $25 per hour, for just 8 hours a week could earn you an extra $800 a month.
- Teach English online and make $20 an hour – so earn $200 a week, working just 10 hours a week, and $800 a month!
There are plenty of jobs you can do from home, which is great.
Check out these posts for some paid opportunities:
- Our Favorite 150 Legitimate Work from Home Jobs with No Start up Fee
- 101 Sites to Find Quick Cash Paying Gigs Near Me (Earn up to $71/Hr)
- 95 Legit Online Jobs for Housewives (Work from Home Without Investment)
Also, you could do some smaller tasks to make cash, such as:
- Taking surveys for MySurvey and Vindale Research. If you join a few different survey websites, then you could make more than $100 a month.
- Do fun and easy tasks, like playing games and watching videos, on rewards websites, like Swagbucks, and earn from $30 to $50 a month.
Saving money for a house does take quite a lot of planning. But if you take the time to plan out a budget and make a savings plan, and take a few extra steps to free up more of your income, buying a home will be a lot easier!
Hopefully, you’ll put these tips into use and save enough money to buy your first (or second, third…) house quickly.
Also if you have any tips of your own, let us know in the comments section below!
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