5 Steps to Budget for a Home Down Payment
Saving for a home down payment is a big, short-term savings goal for most people. To save for this requires disciplined and consistent budgeting, and ensuring you (and your partner if working together) are optimizing the margin needed in your budget.
1. Set a target monthly mortgage payment
We looked at our income and decided our mortgage payment (including the principal, taxes, and insurance) should be around 25% of our take-home pay. We wanted enough room to cover bills, live comfortably, and save for other goals once we bought and moved in.
For example, if monthly take-home income is $10,000, the mortgage payment is around $2,500 per month.
2. Use that number to set our maximum home price
Next, we used a mortgage calculator to reverse-engineer what price the home should be to fit the target monthly payment. We factored in local property taxes, insurance, and potential HOA fees according to some of the areas we were looking in.
Continuing the example, a $450,000 house could fit a $2,500 monthly payment, with the following:
20% down: $90,000
30-year fixed loan (do the numbers for a 15-year fixed as well and compare - 15-year fixed is the most ideal)
5% interest rate
0.73% property tax rate
$2,221 annual home insurance
$100/month HOA fee
3. Lock in a down payment target
Try and avoid PMI, so aim to save 20%.
In the example above, that would mean saving $90,000.
4. Improve your current financial situation (build security so home ownership is less of a burden)
Free up as much income as possible to boost the margin in your budget (margin = income left over after expenses that can be put toward goals). E.g., pause retirement contributions.
Pay off all consumer debt to free up even more income.
Save up 3-6 months of emergency cash-on-hand. You’ll need this when an important thing breaks in the house.
5. Save for the down payment with intensity
Now that income is freed up from payments and there’s emergency cash in the bank, stick to a conservative budget, leave retirement contributions off, and throw every extra dollar toward the 20% down payment goal.
Pro tip: Decide to wait to engage a realtor until you are nearly at your target down payment amount. This will give you a big boost of confidence and power and keep the stress low.
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