If Buying a Home Seems Impossible, Create a 3-Year Savings Plan

Conversations between landlords and tenants sometimes go like this: The landlord asks the tenant why they are spending their rent money when their monthly payment can go towards owning the home. The tenant says, “I have no money for a down payment.” If the tenant is lucky, the landlord shrugs, the conversation ends there, and the tenant doesn’t feel guilty about having a discussion about the intricacies of home ownership that they may not be willing to consider. For many, home ownership seems like a pipe dream.

But it may seem a little less impossible if you think about it in a shorter amount of time. Could you afford to buy a house if you saved up for three years?

Bankrate surveyed over 2,500 people about how much they save on their first home purchase. Millennial respondents reported that it took them three years to defer a down payment, while GenX took an average of two years and nine months to save money. It took Baby Boomers 2.5 years to save.

How much could you save on a home in three years?

If the thought of cramming all the necessary savings for a down payment in just three years makes you nauseous, I don’t blame you. But you can also think of the old house saving method: save and save up to 20 percent of the value of the house.

But the typical home purchase these days only requires a down payment of 3 to 5 percent of the home’s value – and this is true for both conventional loans and new homebuyer programs . And thinking about how to save that amount can be much easier than thinking about what you are going to pay in the next 30 years. So when you’re just starting to wonder if buying a home will be your future, don’t dwell on 30-year-old math enough to scare yourself off and put up with renting a home until you die. To get started, look at the smaller amount and calculate how much you could save on your down payment in about three years.

Here’s a hypothetical example. Let’s say the homes you’re aiming for in your area typically sell for about \$ 450,000. You are going to get a fixed mortgage for 30 years and pay 5%: \$ 22,500.

Break this down payment amount into three-year savings: \$ 7,500 per year.

Maybe you think it is doable. You think, “I can cut my expenses and find that money,” or “I’ll pick up a few extra shifts for my weekend show.” Maybe this is not for you at all and makes you reconsider your approach. But thinking about saving on a \$ 22,500 and 5% down payment seems much more realistic than saving \$ 90,000 on a 20% down payment, doesn’t it?

Of course, the closing costs need to be considered, as well as the monthly mortgage insurance and property tax payments. And you still need to maintain a healthy balance in your emergency savings fund while you save money to buy a home. You need to make a contribution to your retirement fund so that you can afford to live in your home after the mortgage is finally paid off. No one should throw themselves into home ownership if it means a critical strain on their finances.

But if the idea of ​​a huge down payment is holding you back, owning a home may be more attainable than you once thought. Play around with the numbers (I used mortgagecalculator.org in my example) and think about how much you could save in three years. You may be surprised how much the numbers determine your plans to buy a house or not to buy it yet.

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