How To Save For A Down Payment

Regardless of whether you want to buy a condo in Toronto or a Penthouse in New York, you'll need a down payment. In this article, we'll discuss how to save for a down payment and where to invest your savings to earn even more money.

How Much Do You Need To Put Down?

Plan on saving 20% of the down payment on a home. This can save you money by avoiding mortgage insurance on top of your principal and interest each month. In the United States, this insurance is called Private Mortgage Insurance. In Canada, it's called Canada Mortgage and Housing Corporation mortgage loan insurance.

While it's technically possible to get a 0% down payment in the United States, there are many restrictions on those types of loans, including income caps. In Canada, you need a minimum of 5% to put down on your home.

Put Together A Budget

In order to save effectively, you need a budget to provide structure to your savings. Many people use the 50-20-30 rule. This divides your income up into the following categories:

• Use half your budget for necessities such as rent or mortgage, food and utilities. This also includes transportation and other basic expenses.
• Approximately 20% of your income should go towards long term savings. This could include paying down debt, saving for retirement and your car loan. You may wish to put a little more into this category if you are fast-tracking your savings for a down payment.
• Last but not least, 30% covers the nonessential but important things in life such as pet care, gym memberships, eating out, cell phone and cable. This is the primary area that people look to when they want to start saving for a down payment. Where can you save money?

Organizations That Help With Your Down Payment

There are organizations in Canada and the United States that can help you with your down payment. In the United States, check out the following organizations to see if you qualify for their assistance:

• Federal Housing Administration
• US Department of Agriculture Rural Housing Service
• Veterans Administration

There also may be local housing authorities that assist first-time and low-income home buyers.

In Canada, you can take advantage of programs such as the Home Buyer's Plan or the First-Time Home Buyer Incentive. In the US you can take advantage of a home buyers program in your state. 

How To Save Money For A Down Payment

It may take several years to save a down payment. That's completely normal. Remember that the higher your down payment, the lower your monthly mortgage payments will be.

Here are some ways to save money and jumpstart your down payment savings efforts. 

1. Automatically Transfer Money Into Your Savings

You can set up an automatic direct deposit that goes into a separate savings account for your down payment. Consider these funds untouchable and you can watch the balance grow quickly.

2. Are You Willing to Skip Vacations?

If you have prioritized saving for a home, you may be willing to give up vacations for a year or two. Discuss this as a family and make sure it's something that you are willing to sacrifice.

3. Cut Expenses

Look for ways to eliminate expenses. Any money that you save should go into your down payment account.

4. Reduce Your Debt

While saving for a down payment is important, make sure that you are also budgeting for high-interest credit card debt. Look into lower interest credit cards to decrease your debt wall prior to buying a home.

Start with the highest interest credit cards to get the most impact and put a little more towards them each month. It may take a little longer to save your down payment but that beats going into homeownership with high debt.

5. Borrow From Your Parents or Relatives

Can your parents help you with the down payment? You may not want to ask, but if your parents are able and willing to help out, accept it gratefully. Remember to report the gift amount on your loan application.

6. Borrow From a Retirement Plan

Most retirement plans offer penalty-free withdrawals for home buyers. Find out more about the conditions of borrowing from yourself to come up with a down payment before withdrawing any money. Even if you borrow from your retirement account to save for a down payment, you should continue contributing while you look for a home.

7. Sell Some Investments

If you have investments that you can liquidate to buy a home, it may be a good idea to do so. When you buy a home, your equity increases every month. This is also an important investment in your family's financial future.

8. Shop Around For Mortgage Rates

Finally, shop around for the best mortgage rates. Believe it or not but shaving a percent or two from your mortgage interest rate could save you a lot in the long run.

Investment Options to Maximize Your Savings

Do you plan to buy a home in the next one to four years? If so choose a savings account or go for a low-risk investment account to keep your funds secure and liquid.

Should You Invest Your Down Payment Money?

If you calculate that it will take you longer than four years to save a down payment, it makes sense to invest the money. With a longer time frame, temporary ups and downs in the market will not derail your long-term goals. You can earn more money over time by considering different investment options and choosing the one that's right for you.

Self-Directed Trading 

Self-directed trading involves picking your own stocks. With a little research, you can find the best trading platform with the lowest fees. Look for U.S. and Canadian platforms that don't charge commissions. Unless you know the ins and outs of the market, leave the stock buying to your financial advisor and other professionals. Day trading may not be the best way to grow your down payment money.

Automated Investing 

Many future homeowners choose a robo-advisor to grow their wealth. You answer a few questions and they invest money on your behalf. Unless your name is Warren Buffett this might be a better option rather than self-directed trading which few people manage to crack. 

A robo-advisor is a digital platform that automatically invests your money without human intervention. These platforms optimize your passive income by following investment strategies driven by algorithms. This is often an inexpensive way to grow your down payment fund without a high initial investment.

Don't Forget to Invest in Your Retirement

Don't neglect to continue contributing to your retirement funds while saving for a down payment. Continue to contribute to a 401K or an RRSP stay on track for your golden years.

Saving for a down payment may seem like a big change to your financial strategy. However, you can find ways to save money and spend quality time with the family without spending a lot of money. Are you up to the challenge?