This Is How To Save For A Home – If Your Serious About Buying
Saving to Buy a Home
Purchasing a house is a life-changing experience that is worth dreaming about; saving up the deposit to do so, however, is significantly less exciting. The more money you're able to put down to purchase the home up front, the less money you'll have to borrow to own the home.
- Determine the Amount You Need to Save
- Fast Ways to Save for a House
- Automate the Savings Process
- Help Purchasing a Home
Here are some tips to help you save that deposit as fast as possible:
Determine the Amount You Need to Save
Spend some time doing the math and determining how much you can afford. As you do so, be sure to be realistic. If your budget is small, you may need to think about a small property, a home that's in another geographical area, or a house that is older, just so that you can get started.
As you try to determine how much money you’ll need to save, one important step is to check your loan to value ratio (LVR). To find this number, you divide the amount of the home loan by the purchase price of the property. Lenders use this number as they’re trying to decide how risky it is to give you a loan on a home. It may also determine if you’ll be charged mortgage insurance by your lender. If the ratio is over 80%, it’s likely that you’ll owe the insurance amount in your loan, as well.
Case Study: Britt calculates her loan to value ratio
Britt would like to purchase a one bedroom apartment. She estimates that this will cost $500,000 in the areas she's evaluating. After careful budgeting, she determines that she can afford to take out a $450,000 mortgage, and this means that she'll need to save a deposit of $50,000, as well as her purchasing costs.
Next, she calculates her loan to value ratio.
A $450,000 loan/a $500,000 property value totals a 90% LVR
Since her LVR is higher than 80%, she realizes that she'll also be charged for lender's mortgage insurance and will need to plan for this expense.
To avoid the additional cost of mortgage insurance, Britt could look for a cheaper property where her deposit meets the 20% criteria or hold off and save more.
Research Local Property Rates
The market for property is constantly changing. As you're trying to purchase a house, do the following in the areas that you're considering:
- Research online using real estate sites
- Go to local property auctions or showing
- Set up alerts for new properties listed in the area your considering
Quick Ways to Save Up a Deposit
You have to have a savings plan to build up a deposit for a home. Spend some time calculating how long you'll need to save up the amount that you need, and how much money you need to set aside each pay period in order to do so.
Limit Extra Purchases
One of the best ways to do this is to do a thorough budget. Write down all of your vital expenses like bills, rent, and groceries, then subtract this total from the income that you make each month. Any money that you have left could be set aside for your deposit if you don't spend it on discretionary purchases.
If your budget is cut to the bare bones, you may find that you overspend and it's more difficult to reach your goals each month. So leave in a few small fun expenses, and try to set aside money for lower cost things that you like to do. Reward yourself if you hit a smaller savings milestone, as well, to keep the momentum going.
Consider Moving Back Home
Although it's not immediately an appealing thought, many individuals opt to move back into their family home as they save money for a down payment on their first house. Rent is a high expense, so if you're able to eliminate it for a while, it's possible to increase your money available for savings dramatically.
Automate the Savings Process
Make it easier to see your savings grow by adding money to your account the day you get paid. You can even set it up so that your money is transferred automatically, or so that your payroll deposit sends part of your pay to your savings account.
Automatic transfers allow you to forget about the process and still know that your savings are growing, even if you forget to manually transfer money.
Consider a High-Interest Savings Account
After you know how much you have available to save, be sure to make that money work for you. Don't leave it in your everyday checking account where you might use it accidentally. It will also earn less interest there; instead, move it to a higher interest savings account.
If you're able to find a savings account that offers you some sort of bonus, such as a higher interest rate for not withdrawing money, you'll be even less likely to take money out of the account.
Help Purchasing a Home
If you are interested in purchasing a home, the Department of Housing and Urban Development (HUD) has two systems that can help make your purchase more affordable.
The Federal Housing Administration (FHA) runs the FHA loan program. If you are a first time homebuyer, this type of loan may be good for you as the requirements are not as strict as other loans. Your credit score can be lower, you may need a lower downpayment, and your closing costs could be partially covered by the program.
If a homeowner defaults on a mortgage that was insured by the FHA, HUD then takes over the property, as they handle the loan program. These houses may be called HUD homes or real estate owned property. It may also be easier to get a loan on this type of home purchase.
Get a full list of government backed housing programs here.
Purchasing a house is a giant milestone, and it can be easy to be intimidated by the process. Make the process simpler by budgeting carefully, so that you can stress less and enjoy your day to day life more.