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- Before saving for a down payment, calculate how much you’ll need and set a deadline.
- Automatic deposits can make it easier to save, and you may find ways to cut expenses to save more.
- There are also down payment assistance programs that may be able to offset your costs.
Your down payment plays an important role in your home purchase. Not only will it influence what you can afford as a buyer, but it can also impact your interest rate, what loans you’re eligible for, and your monthly payment, too.
Here are some strategies to help you better save for a down payment.
Setting a down payment goal
Before you can set a down payment goal, you first need to figure out how much you’ll need for a lender to approve you for a mortgage.
Determining the size of down payment needed
The minimum size of your down payment will depend on the loan program you use. While some allow for down payments as low as 0%, these aren’t available to all buyers. (VA loans, for example, are only for veterans and military members, while USDA loans are for rural homebuyers at certain income levels).
Here’s the percentage of the purchase price you’ll need, organized by type of home loan:
Factors influencing the down payment amount
Since down payments are percentage-based, your home-buying price range will heavily influence how much you need to bring to the table. A pricier home will mean a pricier down payment.
You’ll also need to factor in how much you have in savings, as you’ll also need to cover closing costs — usually 2% to 6% of the loan amount — and will want plenty left over for an emergency fund. Most experts recommend having at least three to six months of expenses saved just in case.
Strategies to save for a down payment
Saving up for a down payment takes time and effort. You may need to reduce costs, increase your income, or explore other strategies for boosting your savings as you gear up to buy a home.
Here are some options:
Budgeting and reducing expenses
You may find you’re saving too little of your paycheck to meet your down payment goal by your deadline. In this case, create a monthly budget, and think about expenses you can cut back on — or even eliminate altogether.
If you’re paying your bank overdraft or monthly fees, ask about waiving them. Think about any subscription services you could pause, and cancel your gym membership if you don’t use it. Then put that money straight into savings.
Increasing your income
Another option is increasing your income to save for a home. Approach your boss about a raise if you know you’re in line for one, or if you’re willing to dedicate the time, you could ask for more hours or get a second job to bring in more income for a few months.
You could also pick up a side gig in your free time, such as babysitting or driving for a ride-hailing service. You might even rent out a room in your home with Airbnb. These can be good ways to bring in more money now — but just be prepared for the implications come tax season.
Automating savings
If you receive your paycheck as a direct deposit, you may want to arrange for your company to send a percentage of each check directly into a savings account for the down payment. You can also use online banking to schedule regular transfers from checking into savings.
The automatic-savings strategy makes it so you don’t have to constantly remember to save money.
You may also want to save for the down payment in a high-yield savings account, which can help you accumulate interest to put toward the purchase, too.
Exploring down payment assistance programs
Down payment assistance programs can help cover part or all of your down payment. These may come as grants (meaning they don’t need to be repaid) or as loans, which can often be forgiven if you live in the home long enough.
You’ll typically find these programs through your city or state housing department. Income caps usually apply.
Tips for accelerating your savings
If it’s not looking like you’ll meet your down payment goal in time for your home purchase, there are other steps you can take to speed up the process. You can consider:
Cutting non-essential expenses
This might mean forgoing Netflix, Spotify, or other subscription services, or it could entail pausing that gym membership or food delivery app for the next couple of months. Take a look back through your last few months of bank and credit card charges and mark anything that’s non-essential. If you can cut back or eliminate just one of those, it could free up a significant amount for savings.
Saving windfalls and bonuses
Windfalls — or sudden influxes of cash — are a great way to pad your down payment savings. Common windfalls include tax refunds, holiday bonuses, birthday money, and cash gifts around the holidays. Commissions and tips can be windfalls, too.
Downsizing current living situation
Housing can be expensive, so if you can cut back on those costs momentarily, it could save you quite a bit.
Some options include:
- Getting a roommate
- Moving in with mom and dad as you gear up to buy a house
- Moving to a smaller apartment or home
Then, commit to putting whatever you shave off your rent or housing payment directly into your savings account.
Utilizing investment accounts for savings
Choosing the right account can help you boost your savings even more. Here are some options for where you can store your down payment savings:
High-yield savings accounts
A high-yield savings account can help you earn interest on your savings — particularly if you shop around for your account. While traditional savings accounts have interest rates of less than 1%, according to the Federal Deposit Insurance Corp., some online banks are offering rates of 5% or higher. Thanks to compounding interest, that could earn you an extra $2,500 a year or more on a $50,000 deposit.
Certificates of deposit (CDs)
Certificates of deposit accounts are a smart way to grow cash you need at a later date. They offer a guaranteed return on your deposit as long as you keep it untouched for the entire term, which can run anywhere from a few months to 10 years.
Like high-yield savings accounts, these also come with pretty high rates these days. Some offer rates well above 5%.
Investment accounts for longer-term savings
If your purchase is a long way down the road, using investment accounts like brokerage accounts and IRAs could be an option. These have more risk (the stock market or funds you’re invested in could fall), but also offer more room for returns.
Avoiding common savings mistakes
When it comes to saving up, even small mistakes can cost you. This could mean delaying your home purchase or not having enough saved up to buy a home at all. Make sure you avoid these common mistakes when saving for your down payment.
Not having a clear savings plan
Depositing a few bucks here and there isn’t going to make much of an impact on your down payment savings. Instead, you need a plan for how you’ll add regular, consistent money to that fund and continue to build toward your goal.
Will you add to it weekly or monthly? How much will you put in and where will it come from? Map out a detailed plan of attack to ensure you stay on track. If you need help, consider reaching out to a financial advisor. They can offer planning and budgeting tips for down payment savings.
Underestimating costs
Not having a clear picture of how much you’ll need for your down payment (and your closing costs) can hurt you, too. Work with a loan officer and your real estate agent to calculate what you’ll need to buy a home in your area and based on your financial profile. This gives you a clear goal to work toward over time.
Raiding your savings prematurely
It’s tempting to dip into that savings account for that summer vacation or the new pair of boots you want, but doing so will only set you back on your homebuying goals. To avoid the temptation, put your down payment savings in a different account — maybe even a different bank — than your emergency fund and other savings. If it comes with a debit card, put it in a safe deposit box where you don’t have easy access to it.
FAQs
Some loan programs allow for down payments as low as zero. But if you can save up a down payment of at least 20% of the home’s purchase price, you’ll avoid paying PMI (private mortgage insurance), which can reduce your monthly payment. You’ll also get a better interest rate.
To save for a down payment, create (and stick to) a budget, reduce unnecessary expenses, increase your income through side jobs, automate your savings, and explore down payment assistance programs. Using tools like CDs and high-yield savings accounts can help, too.
Yes, high-yield savings accounts, CDs, and investment accounts can be excellent tools for saving your down payment, especially if you have a longer time horizon. Just be mindful of the potential risks and liquidity needs (CDs, for example, come with penalties if you withdraw money too early). You should also shop around if using CDs or high-yield savings for down payments. Rates on these accounts can vary widely.
Common mistakes include not having a dedicated savings plan, underestimating the total costs associated with buying a home, and dipping into your down payment savings early for other expenses. Avoiding these mistakes in down payment savings can help you reach your goal faster.
Many states and local governments offer down payment assistance programs, especially for first-time homebuyers. These can include grants, low-interest loans, and tax credits to help make homeownership more accessible.
