Owning a home is a lifelong dream for millions of Americans. But perhaps the biggest obstacle standing in the way is the traditional 20% down payment people expect they need in order to buy.
Stagnant wages combined with rising expenses and debt mean about a third of Americans routinely run out of cash before payday, according to a new survey from Salary Finance. "People are already spending at their limits," says Steve Sexton, a financial professional and CEO of California-based financial firm Sexton Advisory Group. "It makes it very hard to save up for a house."
Consistent saving, focus, and careful financial planning can put a down payment in reach for many people, though — and the good news is, you may not need to save as much as you think. Here's how to break down your savings goal into bite-size, paycheck-by-paycheck amounts, to save up a down payment within a year or two.
These calculations of what you'd need to save per paycheck to achieve this goal within two years are based on averages. It's smart to run your own numbers based on home prices in your area and the kinds of mortgages you may qualify for. Shortening or extending your timeline can also influence how much money you'll need to sock away every pay period.
Let's assume you're purchasing a home for the national median price of $266,300, per January 2020 data from the National Association of Realtors. If you receive 26 paychecks a year, this is what you'd need to save from each to reach certain down payment goals:
- For a 20% down payment ($53,260) after 2 years: $1,024
- For the average 7.6% down payment ($20,239) after 2 years: $389
- For a 3% down payment ($7,989) after 2 years: $154
Not all of that money may need to come out of your pocket, either. Some cities and states have down-payment assistance programs to help first-time homebuyers and, although it's rare, your employer may offer some mortgage assistance.
Video by Jason Armesto
Make sure you're setting the right goal. How much you need to put down to buy a home varies depending on the kind of mortgage loan and the lender.
"The idea they'll need 20% keeps a lot of people from taking the plunge," Andy Taylor, who runs the mortgage team at Credit Karma, told Grow last year.
Here's why 20% is considered the gold standard: Putting less typically means the lender will require that you buy private mortgage insurance (PMI), adding more onto your monthly payments.
But for a conventional mortgage, lenders often require a minimum of 5% to 15% down to obtain a mortgage, according to Bankrate. In fact, the typical mortgage borrower puts down 7.6%, or $20,250, according to numbers provided to Grow last year by Attom Data Solutions.
So take a look at your options before you set a goal of 20%. You may be able to buy a home with a significantly smaller down payment than you anticipated.
To make sure you're financially ready for homeownership, though, don't focus solely on your down payment. Your overall costs will include regular expenses like property taxes, maintenance, and insurance.
A lot of buyers who are unprepared for those extra costs end up feeling squeezed. As a result, recent surveys show that a lot of homebuyers have money-related regrets. According to one, more than 40% of young buyers are surprised by how much money is required to maintain and repair their homes.
Another shows that nearly 7 in 10 of homebuyers say they wished had saved more money specifically for their down payment. That's in part because the more you're able to put down upfront, the less you'll have to borrow. That, in turn, will lower your monthly costs and mean you pay less in interest over the life of your mortgage.
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