The Dream Home (or Condo): Saving for a Down Payment
I have recently started down the same path my fellow Newly Corporate blogger Brandon Alsup started months ago, the pursuit of the dream home. He started out with the basics of home buying and even detailed questions you should ask when buying a home. I have had similar experiences throughout the initial search and financing processes but, after analyzing my budget, purchase time frame and saving capacity, I found my biggest challenge would be saving for the down payment.
Here is the process I used for calculating how much I needed to save, and three ways I am executing towards that goal.
How much will I need to save?
I am looking at condos in a downtown area, much like many young professionals. With that in mind, I am going to use a median 2 bedroom condo prices of $200,000 for this example. You can plug your local prices in to find your personal goal. I am just going to focus on the down payment and mortgage amounts in this article rather than the rates because rates can vary so much and it gets complicated fast.
The ideal scenario would be to have 20% of your down payment saved up, this way you avoid paying PMI (private mortgage insurance) because you only have 80% of the total value of your home in the mortgage.
Ideal goal: 200,000 * .20 = $40,000
That’s a pretty daunting amount for most young professionals so, many mortgage officers have found other ways to finance your loan. They do 80-15-5 or 80-10-10 financing, the first number being your first mortgage, the second being a second equity line and the third being your down payment. Remember, the more you pay in the down payment, the less interest you pay over the life of the loan because you are not borrowing as much. Here are the cost breakdowns for these two scenarios:
80-15-5: Mortgage $160,000 Second line: $30,000 Down Payment: $10,000
80-10-10: Mortgage $160,000 Second line: $20,000 Down Payment: $20,000
Those down payment amounts are still pretty daunting so, I spent a long afternoon running through budgeting and amortization scenarios. The outcome? I need to save faster!
My Three First Saving Steps Towards a Larger Down Payment
1. Separate Costs in Discretionary and Non-Discretionary - This way you know exactly what you can cut to save quicker, if you really want the condo, you can cut more.
2. Control the monthly costs and the little things first - I immediately analyzed the little things that add up. I adjusted my mobile phone bill (be careful not to cut too deep and cause overages!), bargained my parking fee, called my insurance company to confirm I was getting the best rate and started eating-in more.
3. Start a specific savings account for your down payment and keep it growing! - A seperate account keeps you focused and growth, even if it’s just a bit at a time, keeps you motivated.
Do you have any first home/condo purchase/saving experiences? Please share your thoughts in the comments!
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Tags: Budget, Budgeting, Home, Mortgage, The Dream Home
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June 3rd, 2008 at 5:43 pm
How much is the condo pictured?
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June 3rd, 2008 at 11:31 pm
The first step to saving for a down payment is to save your first $1. A lot of young people are too scared and give up. It may take a long time to save, but you’ll get there.
Make sure you’re keeping your cash in a high-yielding bank account (such as ING).
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June 4th, 2008 at 12:55 am
A simple thing that you can do is pay yourself first. Select an amount you wish to save per month/year/week/etc.. and break that down into paychecks or other time goal. Then on that interval, move that dollar amount over.
For example, I selected a target amount to put into savings and divided that amount over 24 pay periods in the year. Then 1 day after each pay period I have a recurring deposit made into my savings account. This way I can ensure I’m getting a better interest rate (in my case my Savings > Checking interest) and I’m also automatically saving for the future.
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June 4th, 2008 at 9:10 am
One way that you can get that down payment faster, assuming you’re willing to live with the trade-off, is to move home and live with your folks for a year or two.
Advantages:
- SAVES MONEY FAST! You can decrease your monthly rent to either 0 or something more manageable than $850 you are currently paying renting your own place as your parents might want some money to cover their expenses. You also save money because you have fewer utilities to pay (electricity, landline, internet, water, etc) because you can share these services
Disadvantage:
- you have to live with your folks and that might be a killer for many people
- I repeat, you have to live with your folks
- where do you store your furniture/belongings?
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June 4th, 2008 at 1:40 pm
And if you plan to invest in a caribbean business, visit my blog dedicated to helping Caribbean Entrepreneurs to share experiences and knowledge relative to the business environment in the Caribbean.
That cannot be but an advantage for you, your company and your network.
Caribbean Entrepreneur’s Blog
June 6th, 2008 at 10:06 am
[...] I kicked my down payment savings effort into high gear and continued to tighten my budget, I called my insurance agent to discuss what I [...]
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June 8th, 2008 at 2:37 pm
Brandon–you’ve got an error in your 80-15-5 and 80-10-10 notes. There is an extra “0″ in both of the “down payment” amounts.
There’s also a spam post 2 above, from “Maxime Mottin”
June 10th, 2008 at 10:06 pm
[...] a new banking website. Jon Gaskell saw a need for a financial site that woud help people create a goal and save to reach that [...]
August 1st, 2008 at 10:09 am
[...] Puluwai - As I have detailed in a series of posts, I am looking to purchase a house or condo sometime in the future (as are many other young [...]