Today, home buyers are faced with high down payment requirements of various lending companies. Higher down payment requirements in addition to closing costs and prepaid expenses can prohibit many individuals and families from buying their dream home. If you are in the market for a new house, you will need to know how much you can afford and look only at homes within your price range. In addition, it is also smart to put aside money for your down payment before closing a deal.
What Is Down Payment?
As a homebuyer, you have to understand what a down payment is. This is the upfront investment you make when you apply for a mortgage. Generally, a down payment is about 5%-20% of the purchase price of the property.
For instance, you found the house that suits your needs and preferences, and you have negotiated with the seller to buy their home for $400,000. If a lender approves your mortgage with 10% down, you need to pay $40,000 upfront plus additional closing costs. With that said, you will be borrowing the balance of 360,000.
Now that you understand how down payment works, you also need to know the two factors that affect how much you need to save:
- The purchase price of the property you bought
- The down payment percentage required by the bank.
You have to remember that the higher your down payment, the smaller your mortgage and monthly payment will be. This can lead to bigger savings in the long run.
Simple Tips That Lead To Huge Savings
Savings Account: If you are planning to buy a home, you will need to save for a down payment. One of the ways to do that is to set up an interest-bearing savings account. This means that you need to deposit, but you can't extract money.
Forced Savings: You can also force yourself to save a few bucks from your paycheck. For instance, you can take a fixed amount between 5%-20% from your paycheck and place it directly to your savings account. If possible, you can ask your employer to automatically deduct the amount from your paycheck over a period of time so you will be forced to save money.
Cut Back On Expenses: The best way to cut back on your expenses is to set up a budget. You must list down your essential costs, including your rent, food, and utility bills. Subtract the amount from your income. You can deposit the amount left to your savings account. Since you are saving up for a very huge investment, you must try to avoid spending on non-essential items.
Move To A Family Home: This may not be a very appealing tip, but you can save a lot more if you move back into the family home when you are trying to save for your first house. You have to understand that renting is a very huge expense; thus, by trying to avoid this expense, you can quickly increase your savings.