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The McMullen Group Blog

How To Save For Your Down Payment In 1, 3 Or 5 Years

Joseph Coupal - Monday, February 26, 2018

McMullen Group, Hanover, Boston, MABuying a home is likely the biggest purchase you’ll make in your lifetime, and one that can seem overwhelming. If you’re considering purchasing a home in the not-too-distant future, now’s the time to start saving.

Whether you’re working with a timeline of 1, 3 or 5 years, here’s everything you need to know about saving for a down payment.

Set a Clear Savings Goal — Before you start saving, know your goal. While some mortgages do allow a smaller down payment – such as three or five percent – as a general rule of thumb, plan to make a down payment of at least 10 percent on your home loan, if not 20 percent. A down payment of 20 percent would reduce your overall costs by eliminating private mortgage insurance (PMI) that is required on anything less than 20 percent.

Not sure how much you can spend on a home? Getting prequalified for a home mortgage can give you an idea how much you can afford. From that number, you can determine how much you need to save for a down payment. Keep in mind that in addition to your down payment you’ll have additional expenses, including closing costs, which typically amount to about three percent of the price of the home. (Your mortgage lender can provide you a better estimate on closing costs and exactly how much cash you’ll need to bring at closing.)

For the purposes of this guide, let’s assume you are a first-time buyer looking to buy a home that costs $300,000. To put 20 percent down, you’ll need to save $60,000. While that number may seem insurmountable, with a clear goal in mind, it is possible to save what you’ll need for a down payment in one, three or five years. Here’s how.

Save for Down Payment in One Year

If you’re starting at zero and your goal is $60,000, that amounts to $5,000 per month for 12 months. This is not a challenge to take lightly. You’ll have to make some serious cuts in expenses if you want to achieve your goal in one year, but it is possible.

Move In With Friends or Family — Slash your rent payment by moving in with family or friends while you save for a down payment. Offer to do work around the house to further reduce costs. Mowing the lawn, cooking and cleaning, child care, pet sitting — any mutually beneficial arrangement you can work out to reduce or eliminate rent payments can help you put away a sizable chunk of change each month.

Sell Non-Essential Assets — If you want to save for a down payment and you’re currently paying a car payment, consider selling your vehicle and purchasing a basic ride to get around until you’ve purchased your dream home and can afford to pick up another car payment. Sort through other belongings such as clothing, housewares, books and electronics. Sell your stuff at a consignment sale, in a garage sale or online yard sale.

Cut the Nice-to-Haves — Cable, Internet, Netflix, etc. – while these little luxuries are nice to have, they’re just that. Not a necessity. Reduce your monthly expenses by cutting ties with your TV service, Internet provider and any other utilities you can live without. Doing so could net you anywhere from $50 to $300 a month, or more, depending on what you’re currently paying. Now’s also the time to talk to your cell phone provider about downgrading, to a basic, more affordable mobile plan.

For the next 12 months, ask yourself, “Do I need this?” If the answer is “no,” don’t buy it.

Pick Up a Side Gig — It’s time to add a new word to your vocabulary: Hustle! Look for ways boost your income with a second job or side gig. Start by thinking about the things you already enjoy doing. Pick up a job tutoring students, walk neighborhood dogs, referee youth sports leagues, substitute teach – these are just a few ways you can start earning extra income to help you reach your savings goal in a year.

Say “No” — During this year of hard core savings, you’ll need to learn how to say “no” to most social invitations. While you might miss that annual weekend getaway with the girls, or playing a round of golf with the guys after work, skipping out on these splurges can easily help you save several hundred, if not a few thousand bucks over the course of a year.

Save for a Down Payment in Three Years

Now you’re looking at pocketing about $1,700 a month in savings to reach your $60,000 goal in three years. It’s certainly still an ambitious goal, but with three years, the lifestyle changes necessary may not be quite so extreme, though the basic principles of saving stay the same.

Lower Your Bills — Cut your cable and switch to a streaming service, like Netflix, which costs anywhere from $10 to $14 per month. You’ll still be able to watch many of your favorite shows, without a monthly cable bill of $100 (or more!).

Pack Your Lunch — If you buy lunch out every day, you’re probably spending anywhere from $40 to $80 a month on lunch alone. Slash your meal costs in half by making your meals to go from home.

Cut Back on Entertainment — Remember that streaming service you signed up for? Plan date nights in, rather than forking over $35 to go on a date to the movies. Sell your season tickets and cancel your golf course membership.

Negotiate Your Bills — Contact your service providers, such as your home and auto insurance company and cell phone provider to discuss your options to lower your bills and trim your expenses. Ask about basic services and request discounts that can help you save on your monthly bills.

Save Your Windfalls — Your annual work bonus, commission checks, tax refund, gifts and any extra income should be put directly toward your down payment savings. These one-time infusions of cash can help you reach your savings goal and if you’re living on a budget, you won’t need it anyway.

Save for a Down Payment in Five Years

You’ll certainly have the most flexibility with this time frame, but you’ll still need to save $1,000 a month if you want to reach your savings goal in five years. Use the tips above to help put more away in savings. With the extra time, you also have a few other options to help build your savings.

Put Your Money in the Market — You won’t need the money for five years, so consider investing your savings, enabling your money to work for you. If this sounds too risky, consider building a CD ladder by 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. CDs 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 re-invest it in a new CD for continued savings.

Set Up a Traditional Savings Account — If you aren’t sure about investing in the market, or tying your money up in a CD, 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. 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.

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.

No doubt, saving for a down payment requires discipline and dedication. Spending less and saving more can be frustrating at times, but making temporary sacrifices and being intentional with how you spend your money can result in a big payoff.

If you’re in the market for a new home, get the ball rolling now. Contact a mortgage expert today to get details on your loan options and start the application process.