If you want to be smart with your money, staying out of debt is critical. Debt comes with interest attached, and paying interest is like paying for the money itself. This is redundant spending.
The conventional home mortgage is the most dramatic example of redundant spending as a result of interest. In a 30 year mortgage, at a 5% interest rate, you’ll likely pay for your home in full almost three times before the end of the loan term. That’s steep.
There are three ways to reduce this redundancy and save money.
• Take out a mortgage with a shorter term or a lower interest rate.
• Pay off your mortgage early by making extra payments.
• Pay more up front with a higher down payment.
These solutions are intuitive. But better mortgage rates and terms aren’t available to everyone, and if you’re taking out a mortgage, your income may not allow for extra payments. The third option—starting off with a higher down payment—is the most effective one. It’s tricky, though. In order to make it work, you’ll need to save up a large sum of money before you even consider looking for a house to buy. Keep the following tips in mind as you save for your down payment.
- • Identify your goals. Be intentional about your savings plan. Cut unnecessary spending from your budget. Remember, your goal is to buy a home. You won’t be saving up for this forever. During this chapter of your life, eliminate needless spending—such as excessive entertainment or shopping sprees—and put that money toward your future home.
- • Open a separate savings account. Keep all your down payment money in a single account, separate from your other funds. This will help you avoid spending the money inadvertently, and it will help you track your progress as you save.
- • Get a second job. Again, saving for a down payment is just a short chapter of your life. It may be draining to take on a second job, but if you’re able to put all your newfound income into your down payment account, you’ll have the amount you need in no time.
- • Skip vacation for a year or two. A vacation typically costs a family several thousand dollars. Skip vacation for two years or so, and you’ll likely save a sizable amount of money—possibly even 2%5 or 50% of your total down payment.
- • Start now. Saving money is a slow, steady process. Start as soon as possible, even if you’re only putting away a small amount at a time. Every little bit helps. If you wait until you’re “ready to start saving,” you never will.
About the author: This guest post was provided by Kyle, a content specialist at Lender411.com. Lender411.com helps homebuyers compare mortgage rates, find local lenders, and locate the best mortgage packages available.
This is something I definitely need to concentrate on. I want to put a downpayment on an apartment in a year or two, but it is a struggle to save up all that money. Where we live, we get a big tax break if we put down at least 20%.
Consider “sweat equity”.
I think is very difficult to save money for big things because this process takes very much time and efforts. Until know every big thing I bought was by credit, but thanks for your advices; is good if someone can focus on it.
When paying off the mortgage early, 1st make sure that yours allows this without penalties. If there are none, remember that every little bit helps. If possible write the check (or electronic debit) for $15 higher than you owe each month. Over 30 years you will have put about $5400 on the loan, but saved a total of $12,500. (On a loan at 5%) Not bad for $0.50 a day! If you can afford to make whole extra payments, every whole extra payment (equal to principal and interest portion only) that you pay in the first year will knock 4 payments off your loan, on average.
The best way I know to save up a bundle is to live way below your means for several years. You don’t even have to scrimp on small items like coffee or groceries. Most important is to trim your major costs like housing and transportation by as much as you can stand. Live with parents, live with roommates, get a small apartment that’s not so nice…like the article says, you won’t be doing it forever. Pay cash for a junk car then drive it to the ground. Cutting recurring costs like cable, internet, and cell phone is another good one. It all depends on what lifestyle you can stomach and if you can keep your eye on the prize. I continued living with my parents for years out of college even though I had a good job. It definitely wasn’t the world’s most fun thing but now I have no debt, can afford a large downpayment, and still have emergency reserves. It’s worth it!
Great post! I have been saving for a house and now that the housing market in my area is dropping, its going to be much easier to get into a house. Savings of $20k in 9 months should be a good down payment on something that was worth $400k just a few years ago.
Soon that house will be used as a rental, which I will then repeat the process until I have multiple rentals and a cash flow income.
Good post!
This tips are really very helpful to all who really need to save money to payoff their loans and mortgage. I would say that one should not spend money in all kind of unnecessary things. They should control over their expenses so that they can pay back their loans as soon as possible. This will save their amount of interest also.
Those are some great tips, My favourite was skip vacation for a year or two.
The problem is we always want the best and that tends to make us extend ourselves. It’s even harder when deciding to lower expenses by moving down to a smaller home.