Owning a home is a big step and one that requires the help of a dedicated savings plan. You’ll need to save for a down payment, closing costs and furniture and other move-in expenses. Hopefully when you buy a home you will have found the best home warranty in CA and be able to have peace of mind when it comes to repairs and replacement costs.
Saving for a home will likely require some sacrifice, but the rewards are worth it. Here are a few reasons why:
- You’ll be able to pay off your mortgage faster
Getting rid of your mortgage early is a great goal to strive for, but it’s important to make sure you have all of your financial ducks in a row before you get too aggressive. If you don’t have a solid emergency savings fund, for example, you could wind up in a sticky situation if an unexpected expense comes up.
You can also save money by making a few small changes in your lifestyle. For example, Deacon and his family recently started ordering water at restaurants instead of soda to cut down on restaurant spending, which has added up to significant savings over time.
Other ways to save include lowering your utility bills, exploring tax breaks, refinancing your mortgage and boosting your credit score. By following these tips, you can take control of your finances and reach your mortgage payoff goals sooner than you might think.
- You’ll be able to avoid paying high interest rates
If you’re able to save enough for a significant down payment, you may be able to avoid paying high interest rates on your mortgage. Most lenders will give you a lower rate if you have a larger down payment because the loan-to-value ratio is smaller, meaning less of their money is at risk.
But you should only buy a home if you’re comfortable with the housing prices in your area and you can afford the monthly payments (including principal, interest, homeowners insurance, and HOA fees). If not, you could end up house poor, which can take away from your ability to pay off other debts or save for retirement.
Make sure to focus on saving for a down payment first, and use every resource you have to reach your goal—including cutting back on spending, finding a second job, or selling your car. Depending on your location, you might even be able to qualify for energy rebates or tax breaks that can help you cut down your utility bills and save more each month.
- You’ll be able to save for a down payment
There’s no single formula for when or how you save up for a down payment. The first step is to create a savings plan, accounting for all of your monthly expenses and
income. Once you know how much you can realistically afford to set aside each month, you can focus on finding ways to fast-track your savings.
Fortunately, it’s not as difficult to save for a home as many people imagine. The biggest obstacle to homeownership is typically debt, so paying off your credit card and student loans as quickly as possible is a great place to start.
Next, cut down on expenses like eating out or impulse purchases. Packing your own lunch to work can save you $60 a month—or $720 a year, according to experts. You could also consider investing your windfalls, such as a tax refund or birthday gift money, into a savings account that earns interest rather than putting it in an ordinary checking or savings account.
- You’ll be able to avoid paying private mortgage insurance
Private mortgage insurance, or PMI, is a monthly fee that’s added to your home loan payment. It protects lenders in case you default on your payments. It’s a common requirement for conventional loans that are not backed by the government, such as Fannie Mae or Freddie Mac.
The best way to avoid paying PMI is by putting down 20% or more when you close on your house. However, many new buyers find it difficult to save this amount upfront.
To help them overcome this hurdle, some people seek out creative financing solutions. For example, they may borrow from family members or use personal funds to cover part of their down payment. They also opt to buy a less expensive property or wait for the market to improve. Another option is to look into veteran loans, but this option is only available to those who meet specific requirements. In most cases, the federal Homeowners Protection Act requires that a lender cancels PMI once the homeowner reaches 22% equity in their home.