Learn how to save for a house—and how to keep your cash safe while you’re building that down payment.
In a recent article, we considered the decision of whether to buy a home or continue renting. The answer may partly depend upon how much value you place on stability and planting roots versus flexibility and mobility. Buying a home is still part of the American dream, and with interest rates still low and housing prices reawakening, many people are seeking to buy. But to buy, typically you first need to save some money.
Jerry Anderson, vice president of residential lending at Alliant Credit Union, said saving for a down payment is the biggest obstacle most new homebuyers face. That’s especially true if you’re just starting out, and possibly paying off student loans, auto loans, and even credit card debt.
Plus, if a growing family is the motivator for your upgrade to that first house, well, it’s a lot to juggle financially.
Robert Siuty, senior financial consultant at TD Ameritrade, said the first step is budgeting for the savings goal. That may mean a realignment of expenses—looking for things to trim back.
“If you have cable, do you need it? Or do you need the whole package?” Siuty asks. He also suggests taking a hard look at competing goals, like buying a new car.
Down-payment saving might also mean shifting asset accumulation. “If you’re saving for a house, it may be a higher, short-term priority, so it may mean putting less in a retirement account. That doesn’t mean not saving for retirement, just that this goal is a priority,” he said.
Got a windfall? Don’t blow it. Newlyweds who receive money as gifts may consider using the cash to help buy a home. Gifts from parents can also help with the down payment.
“Practice” life with a higher monthly payment. As a new homeowner, your total monthly housing costs may be higher than what you’re currently paying to rent, Anderson said. One way to get into the habit of living on the new budget is to try saving the difference. That not only helps to build savings, but can also give the new homeowner an idea of how easily they can make the new payments.
“The good thing with that is, you’re setting that goal, saving [extra each] month. Once you’re in the home, you know you can make the payment,” he said.
Learn About Different Ways to Save. Both high- and low-return vehicles have distinct advantages and disadvantages when it comes to putting aside and attempting to grow the money you're saving for a down-payment. At the top of the list is risk. The more aggressive a vehicle is, the more exposure it has to risk, which means it’s more likely to experience peaks and dips in value. More conservative choices can be much more likely to preserve capital, but conversely, present less opportunity for growth. It’s always important to understand the balance of return and risk when considering an investment.
You may choose to keep your short-term savings in money market accounts, CDs, and other common saving products. Or, you may choose to look at vehicles that offer a balance of lower risk with more growth potential.
Read more on short-term investing, including a rundown of the pros and cons of the various investment vehicles.
Evaluate your financial situation and continue to pursue your goals.