By Mike Azzara | American Express Credit Intel Freelance Contributor
6 Min Read | August 13, 2020 in Life
When should you start saving money to buy a house? The sooner the better.
High-interest savings accounts or CDs offer a good combination of safety and better interest than standard bank savings accounts.
Automatic savings, reducing spending, gifts, and technology can help make saving for a house easier on your everyday life.
Finding the right house takes time – and money. So, as soon as the idea of owning your own home pops into your mind, you may want to begin saving money to buy that house. I think of it as a two-fold challenge: figuring out how much money you should save for a house and coming up with the best ways to go about saving that money.
The down payment usually is the top priority when you’re saving money to buy a house. In 2019, the median down payment was only 6% for first-time U.S. home buyers, and 16% for repeat buyers, according to the National Association of Realtors.1 With the median U.S. home sale price at $324,500 in the fourth quarter of 2019,2 that means a typical buyer would have to save roughly $20,000 for a house down payment at 6%, and $52,000 to put down 16%.
But often, those levels mean you have to pay extra later. You’d want to put 20% down – or about $65,000 for that median-price house – in order to avoid paying private mortgage insurance (PMI) and other fees. That said, some lenders offer mortgages through various government-sponsored programs you may qualify for that require as little as 3% down – and some at 0% as well. An experienced lender or mortgage banker can help you figure out the plan that best suits your situation. For more, read “How Much of a Down Payment Do You Need to Buy a House?”
However, the initial costs of buying a house go beyond the down payment – often referred to as the “hidden costs” of purchasing a home.3 They include the home appraisal, survey and title fees, homeowner’s insurance, home inspection, attorney fees, broker fees, and paid-upfront property taxes, to name a few. Seven states also charge a mortgage recording tax. Closing costs, on average, range between 2% and 5% of the home price, or roughly $6,500 to $16,000 for that median U.S. house.4
To get a sense of how much money you will need to save for the house you want, experts suggest you begin by looking at recent home sales for the type of home you want – number of bedrooms, architecture style, finished basement, etc.– in the neighborhoods where you want to live. The prices you find in that research will help you get a sense of what a potential mortgage would look like and the amount of down payment you’ll need.
To illustrate, let’s stick with that median $324,500 for a house. If you aim for a 20% down payment, you’d need $65,000, plus an additional $6,500 to $16,000 or so for closing costs, depending on the location. Then factor in your timeframe for saving. If you want to save the money you need to buy that house in five years, divide the down payment by the number of months (60) and that’s your monthly goal. That math works out to saving about $1,175 per month at the low end of the closing cost range to $1,350 per month at the high end.
Now that you’re saving to buy a house, where do you put the money? Interest rates from old-fashioned bank savings accounts are measured in hundredths of a percent, and there are only so many shoeboxes or mattresses to put money under in your current home. It makes sense to open a high-yield savings account because they earn far more interest on your savings than a standard bank savings account and are still nearly risk-free thanks to government insurance. You also may want to consider a certificate of deposit (CD). Compare the CD and savings account interest rates to determine which offers the best return over a designated amount of time. Opening both types of accounts may benefit you as well.
Automatic savings: Figure out how much money from your paycheck you can afford to get by without and have it direct-deposited into your savings account. You can always tinker with that number as needed, over time.
Audit your existing expenses: Examine your existing monthly expenses such as TV/streaming bills, cell phone bill, gym membership, subscriptions, groceries, etc. Ask yourself, “What can I get rid of?” or “Which bill can I reduce?” or “Can I shop somewhere else for cheaper items?”
Save your savings: Spending less is ideal, sure, but it really helps to put away that unspent money. What good is reducing your morning breakfast bill from $10 to $8 if you’re not putting those two bucks away? If you did that each day, it equates to $10 a week, and $40 for the month. That’s $480 for the year. It adds up over time.
Bank the boons: If there’s a sweet income tax refund headed your way this year, congrats! Now put it all – or at least a big chunk of it – into your savings account. Same with bonuses and big commission checks. For most of us, these financial windfalls occur infrequently, so when saving for a house, maximize their impact.
Second income: Call it a side hustle, a second job, joining the gig economy, whatever you wish. Bringing in additional income makes balancing saving for your future home with your daily lifestyle a little easier.
Gifts: Don’t be afraid to ask family and friends who normally purchase birthday and holiday presents for you to put that money toward your down payment fund instead. It’s perfectly fine to say, “Hey, ma, I’m good with socks and underwear right now, how about you put that $30 toward my house instead?”
Use technology: Saving for a house? There’s an app for that, and they can help you put money away for a house without you really noticing the impact on your wallet. Some apps round up your purchases to the nearest dollar and put that change into an account. Other apps analyze your daily spending habits and suggest how to save. Such technologies often charge a fee for this, so weigh that amount as you decide on where to save your money.
Loan yourself the money: You can borrow against your 401(k) retirement plan to help with the down payment. You’ll have to pay it back, with interest, but there are times when it makes sense to reach into your retirement savings for a short-term loan.5
Sell other investments: If you have other investments, like stocks, bonds, or even a perfectly restored ’57 Chevy, consider selling them to help pay for your house. That house could be your next great investment.
Saving money to buy a house takes time and effort. Start saving immediately by first estimating how much money you’ll need to save for the kind of house you have your eye on. Then, establish your time frame to have money in place for the down payment and closing costs, and do the math to establish your monthly savings goal. You may want to look for ways to reduce your spending, then save those unspent dollars. And you may want to use a high-interest savings account to let compound interest work upon your savings.
1 “Families Using Creativity When Buying, Selling Homes: 2019 Buyer and Seller Survey,” National Association of Realtors
2 “Median Sales Price of Houses Sold for the United States,” FRED Economic Data
3 “Fees You Need to Know About Before Buying A Home,” The Balance
4 “What Are Closing Costs and How Much Are They?,” Zillow
5 “When It’s Okay to Use Your 401(k) to Buy a House,” The Lenders Network