Simple Ways To Save Cash Without Feeling The Pinch
Buying a home is a big and exciting purchase. For many people, it’s the biggest purchase they’ll make in their lifetime. Of course most people finance a home over a long period of time using a mortgage. But even if you get a home loan, you’ll have to come to the table with the money to cover the down payment and associated closing costs. Just how much money you’ll need at closing depends on the type of loan you are using to finance the purchase. For example, here’s a quick breakdown of the requirements and advantages of four common types of home loans. Remember, there is a wide range of options in each of these categories that a PrimeLending home loan expert can walk you through.
Conventional Home Loan — A conventional home loan is a mortgage that is not insured, or guaranteed, by the federal government. They’re popular with borrowers who have good credit, a stable job and income, who can afford a down payment and people who are financially stable overall. Conventional loans generally offer much more flexible terms and fewer restrictions than government-backed loans, and do not require mortgage insurance if you put at least 20 percent down on a purchase. Conventional loan rates are also often quite low, since the borrower is known to be financially stable with good credit.
FHA Home Loan — If you’re working with limited income or money for a down payment, a government-insured Federal Housing Administration (FHA) home loan could be the right solution for you. FHA home loans offer a low 3.5 percent down payment, flexible income and credit requirements and low closing costs. These are popular loans for first-time homebuyers.
USDA Home Loan — The USDA loan, or USDA Rural Development Guaranteed Housing Loan Program, is another type of government-backed loan. Originally designed to provide a mortgage alternative to rural property buyers who had limited financing options, the USDA home loan is becoming a viable mortgage option for people who want to live away from cities and enjoy country living. But even if you live in a suburb, you may find you can qualify for some USDA programs. The USDA loan requires no down payment, has low interest rates that aren’t tied to credit score or down payment, and offers flexible credit guidelines.
VA Home Loan — A VA home loan is a great benefit to military personnel during and after their service. VA home loans are partly guaranteed (typically a quarter of loan value) by the U.S. Department of Veterans Affairs and offer advantages such as no down payment, higher loan value, no private mortgage insurance, a limit on closing costs and other benefits.
Although you’ll want to start saving long before you ever apply for a loan, understanding the loan types can help you determine approximately how much you’ll need to save up. How can you save for your new home without living on rice and beans for the next several months (or even a few years)? Here are some strategies and tips to help you save for the purchase of a new home without feeling the pinch.
1. Start with a Monthly Budget — Let’s start with the obvious…the key to building savings is spending less than you earn. Your first step to saving for a new home (or any purchase) is to create a family budget. Creating a budget where you outline your monthly income and expenses will help you see exactly where your dollars are going, and make a plan to put any extra into savings. Be realistic, and stick to the plan as much as possible.
2. Build a Ladder — CD laddering is a savings strategy with both short and long term benefits. If you’re planning to buy a home in the next few years, investing your savings in the stock market can be risky, but a safer alternative is purchasing CDs, or certificates of deposit, which yield a higher return in exchange for that money being locked up for a set amount of time. Building a CD ladder means you’ll always have access to at least a portion of your money. Certificates of deposit are also a guaranteed investment, so you can’t lose when it’s time to take it out. Once you do pull it out, you can use that money toward a down payment, or reinvest it in a new CD for continued savings.
3. Save Less for Retirement — If your employer offers a 401(k) match, save enough to qualify for that employer-sponsored contribution, but cap your retirement contributions there and allocate any extra cash toward your down payment. First-time home buyers may also be able to use retirement savings to fund the down payment. Typically, $10,000 can be drawn without penalties. But before you scale back on your retirement savings, put these other strategies to work.
4. Go Traditional — If you just aren’t sure about investing your hard-earned money, a traditional savings account can still help you earn income on your savings. Shop around for a savings account that offers at least one percent in interest, and start stashing every extra penny into your savings. Better yet, create a dedicated bank account just for your new home fund, and quarantine it from any spending. Stick to your regular checking account to pay the bills and keep that savings account off limits. The biggest benefit to a traditional savings account is that you have zero risk of losing your money, and it’s always accessible, so the moment you find your dream home, you’ll be able to access the cash for your down payment.
5. Set Up Automatic Savings — Once you’ve established a dedicated savings account, arrange with the payroll department at your job to send a fixed amount to that savings account every payday via direct deposit and the remainder sent to your checking account as usual. You’ll never even notice the money going to savings because it was never in your checking account to begin with.
6. Save Your Windfalls — Any extra cash goes straight to savings. Whether that’s a tax refund or a year-end bonus, putting those one-time infusions of cash can help you reach your savings goal a little bit faster. Use the same strategy with pay increases – divert any additional pay to your savings account. If you’ve created a good budget and are sticking to the plan, you won’t need that extra cash anyway.
7. Cut Big Expenses — While you may really need that vacation, what if you put that money into your housing fund instead? Cutting big, non-necessity expenses allows you to add to your bank account and build savings quickly, rather than pinching pennies. If you can swing it, consider downsizing to drop a portion off your living expenses. If you’re living in a two or three-bedroom apartment and could do without one of those bedrooms for a year or two (especially if you don’t have kids), make the move to a smaller apartment and reallocate the unused rent in to your savings account. A smaller place may also save you money on utilities. Win-win!
8. Work More — If you’re eligible for overtime or additional work opportunities, seize those occurrences. Earning extra income can give a big boost to your savings. Taking on a second job on the side or a few new projects can help. If you’ve got a family, talk to your spouse and consider if you can live with the sacrifice for a few months to help bulk up your housing fund.
Saving for a new home requires dedication and grit. It means saying “no” to that splurge and spending less on frivolous expenses such as eating out and entertainment. Saving can be frustrating at times, but don’t be too hard on yourself. If you cut out going to the movies until you’re in your new home, consider a Netflix subscription instead. Rather than cutting out all dining out, budget to eat dinner out of the house once a month. The goal isn’t to be dissatisfied, but rather more intentional with how you spend your money.
If you’re in the market for a new home, start your journey to homeownership with PrimeLending and the McMullen Group. Contact one of our home loan professionals today to get details on your loan options and start the application process.