The Renter’s Guide to Saving Up for a Home
There are certain steps you can take to make a house truly feel like a home. The first one is, well: stop renting and buy the place!
If only it were that simple…in reality, buying a home can sound like a far-off, daunting concept for many. If “settling down” makes you think less of cozy evenings at home and more of all the payments and bills that come with owning your own place, you’re not wrong. But putting together a plan and identifying concrete action items can help you move towards that seemingly distant financial milestone.
Understanding Down Payments and Mortgages
Let’s start small and break down the basics when it comes to being a homeowner.
The first term you’ll want to understand is down payment. A down payment is the amount you pay upfront towards your home. You likely will not be paying the sticker price in full, which means that you will be taking out a home loan or a mortgage from the bank to cover the rest.
Another common question that follows is, “What is the average down payment?” Some say that a 20% down payment is typical, but in reality this can vary. According to this article from HousingWire, in 2018 the average downpayment in the US was 5.37% of the median house price of $270,000 (i.e. $14,449). Of course, the more you can put towards your down payment, the better, but every situation is different and there’s no shame in the loan game.
Next question: what is a home loan/mortgage? This is defined as “an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you’ve borrowed plus interest.”
Your home loan/mortgage payments can vary depending on how much you are qualified to borrow from the bank, which also depends on a few other factors like your income and debt. But don’t be swayed by the shiny number the bank gives you. Just because you are qualified up to a certain amount, does not mean you have to or should be taking out that much money. The size of your loan/mortgage also depends on your budget!
5 Important Steps to Make Your Homeowner Dreams a Reality
This brings us to our next point: how exactly to save up for a home. You will want to put money towards a down payment while simultaneously maintaining a healthy bank balance to pay off your monthly mortgage.
Here’s the breakdown on how to do just that.
- Determine your timeline.
First things first, determine when you want to buy a home. Maybe you’re ahead of the game and see this as part of a five-year plan that you want to start factoring into your budget now. Or maybe this milestone is just around the corner with a year or less to go until you absolutely need to move into a house. Wherever you are in life, determining this timeline will allow you to adjust your budgeting and savings goals accordingly.
- Pick your location.
Deciding where you are going to live is much easier said than done. If you’re planning years in advance, you may not have complete control over where you live five years down the road. This can also depend on your relationship status: buying a house with a significant other means that you have two opinions and preferences to consider before solidifying your options. Regardless, having a general idea of where you want to “settle down” will provide a lot of necessary context.
It is no surprise that certain regions and states are more expensive than others. So part of this puzzle is deciding what you want to get for your money. There are places where you can get a bigger, nicer home for a good price, but you likely won’t be near an exciting city. If you need to be near the buzz and liveliness of, let’s say, a city like San Francisco, you are likely to get a lot less space. Considering trade offs like these are important to the process of picking a home and understanding how much you want to spend and save.
- Set your price range.
Setting your price range depends largely on the two factors we mentioned above: when you want to move and where you want to move. Of course, there are multiple other bullet points to consider: your salary, your expenses, your debt, and your current savings among them.
Also keep in mind additional expenses beyond your mortgage, such as interest, home insurance, furnishings, and more. As a general rule, your total monthly housing costs (like mortgage, property taxes, insurance, and HOA fees) should not be more than 28% of your monthly income, according to ZipRealty.
- Make your list of non-negotiables & nice-to-haves.
Now that you have your price range, your location, and your timeline clearly established, you can focus on what you actually want out of your new home. This is an especially important step if you are buying a home with someone else.
Take some time to separately write out what your non-negotiable items and nice-to-have items are, and compare notes. Natural lighting may be extremely important to one partner, while the other may prioritize a convenient neighborhood. Understanding these desires is an important step in buying a home that will stand the test of time and accommodate you into your future lives.
- Create a clear savings goal.
Congratulations, you have finally reached the good part! The final step in saving up for a home is doing the darn thing and creating a clear savings goal. We’re sure you still have some burning questions lingering, so we will break things down even further by addressing some common questions.
How do I begin saving for a home?
The number one tip when starting to save is to create a budget. From there you can take the factors mentioned above into consideration and determine how much you ultimately want to spend on your down payment (anywhere between 5-20%+) and mortgage (around 28% of your monthly income).
Now you can factor this magic number into your budget. Depending on your timeline, you can start small by placing, say, 5% of your income into your home savings plan and increasing that percentage as time goes on.
How else can I maximize my savings for a down payment?
Examine your current spending habits to see where you can cut some unnecessary expenses like eating out, skipping a vacation, or cutting out a bad habit (farewell daily $7 lattes). You can also ask for a raise or start a side hustle to add a little bit more padding to your income and a lot to your home savings.
How do I balance rent payments with saving for a home?
We’ve said it once and we’ll say it again: budget well and budget often! Building your monthly rent payments into your budget will help you allocate your earnings accordingly. We recommend spending 30% of your income or less on rent.
Consider living with a roommate or two to bring your cost down, or even renting to own. In this arrangement, you would rent from your landlord for a certain number of years and then have the option to purchase the home from the seller. Depending on your selling agreement, you may even be able to credit a percentage of your rent towards the purchase.
Can I still do fun things while saving for a home?
Of course! If you continue to rely on your budget and get a little creative with how you define fun, there are countless ways to entertain yourself while saving up. Start by brainstorming free or inexpensive ideas, like playing tourist in your own city for a day or going to a free outdoor concert.
Missing your weekly or monthly night out? One way to still shop, eat out, or go to that concert is by using Zip to split your everyday expenses in four. With Zip, you can enjoy the occasional diversion while still sticking to your monthly budget. You can be both frugal and fun, trust us!
This is an exciting next chapter of your life, and we want you to feel as prepared as possible. Make sure to keep all of these tips and tricks in mind when you’re next dream-scrolling through Zillow, and before you know it you’ll be able to make one of those homes your reality.
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Zip’s editorial content is not written by a financial advisor. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.