- Making extra income is one of the best ways to quickly save up for a down payment.
- Not only does paying down debt save you money each month from now on, but it can also increase your credit score, helping you get a lower interest rate.
- As interest rates are increased by the Federal Reserve, savings products pay higher returns, which helps your savings grow faster.
If you’re looking to buy a home, the good news is that real estate isn’t the hot seller market it was a year ago. The market is still not a buyer’s market again, but there is no strong demand for housing at the moment. This means that price increases have slowed, and fewer buyers make your offer more likely to be accepted.
But what if you’re in the early stages of the process and have put together your first batch? How can you build your savings quickly and effectively? Here are some ways to help you save money for a home and where to put the money, so you earn as much interest as possible.
Take a side hustle
One of the first things you can do to help provide for a home is to increase your income. The extra money can be put toward your down payment, allowing you to fund it faster.
If you find that you like your side hustle, you can also keep it long-term and use the cash to pay extra on your mortgage – after you buy – so you’ll be mortgage-free sooner. Or, you can put that money into a savings account and use it as a down payment if you decide to upgrade in the future.
At the end of the day, you need to find a side gig that you enjoy. Otherwise, you’ll burn out, quit, and end up not saving any more money.
Paying off debt may not sound like a way to buy a home, but it is. When you pay off your debts, you free up money that you previously used on loans and credit cards. Now you have more money that can be used to pay your mortgage or save for a home.
Another benefit of getting rid of your debt is an improved credit score. The higher your credit score, the lower the interest rate you may qualify for. Over the life of the loan, this can translate into tens of thousands of dollars.
For example, if you take out a 30-year loan with a fixed interest rate of 7% for $200,000, you will pay $279,021 in total interest. Take out the same loan but at 6.5% interest and you’ll pay $255,085. That’s a difference of about $24,000 in price versus just 0.50% in price.
In addition, lenders look at how much debt you have in relation to your income (known as the debt-to-income ratio) to judge whether or not to lend you a mortgage. Keeping this percentage as low as possible increases your chances of getting approved.
Even if you can’t pay off all of your debt, make it a point to pay off some of it so your credit score goes up and you can make some savings.
Take advantage of retirement accounts
Finally, don’t overlook your retirement accounts. Most experts believe that the money you put into retirement accounts should not be used for other purposes. However, when it comes to buying a home, this asset will only go up over time. So, there is some justification for taking out a loan against a 401k or making a one-time withdrawal from your IRA as a first-time homebuyer to buy a home.
If you have a 401k plan, you can take out a loan from this account. The loan won’t be reported to the credit bureaus because it’s your money, and the interest you pay on the loan is the interest you pay yourself because you take out the loan for your 401k.
While this sounds like a great idea, understand that when you do the math, it’s usually a bad idea because you’ll have less money in your 401k than if you didn’t take out the loan. This is because you lose out on your money accumulation if you leave it invested. Even though you are paying yourself back, the time it takes to pay off the loan will result in you having a lower balance in the long run. In addition, other factors come into play if you quit or lose your job before paying off the loan, the entire outstanding amount may be due immediately.
Another option is a traditional Irish Republican Army or a Roth IRA. With a traditional IRA, you can get $10,000 as a first-time home buyer and not have to pay an early withdrawal penalty. However, you will have to pay federal and state taxes.
A Roth IRA allows you to take $10,000 of the account’s earnings to buy a home. There are no taxes since the money you put into a Roth has already been taxed. Also, you are free to withdraw any amount of Roth contributions at any time.
So if your balance is $100,000, of which $70,000 is a contribution, you can have $80,000 as your down payment. This will be $70,000 in your contributions and $10,000 in earnings.
Another popular way to save for a home is to use windfall money. This includes tax refunds, inheritance and gifts. Using these large sums of money helps you spend as much money as possible and gives a great motivation boost.
If your goal is to save $60,000 for your down payment, and you’ve saved $1,500 so far, it can be frustrating to see how far you are from your goal. But if you get a $3,000 tax refund that brings your total saved to $4,500, it might motivate you to keep moving forward.
It’s important to take time to review how you’re spending money and if there are any areas you could cut back. Doing so can free up money that you can use for your down payment.
The best way to review your expenses is to review your monthly statements. You want to look at roughly three months of expenses in order to see meaningful trends.
Pay attention to the things you buy that don’t have a positive impact on your life. For example, you might see that you make a lot of impulse purchases on Amazon. What can you do to stop these purchases? Are you spending less time on the website/app? Put items into your cart but do not check out at least 24 hours in. Think about these types of purchases and things you can do to reduce your spending.
Also, be sure to look at your utility bills to see if there are simple things you can do to reduce these expenses. If your cable bill is high, you can call and negotiate for a lower rate or cancel and join the crowd of cord-cutters.
Can you shop for electricity in your state? Have you compared car insurance premiums? These can be big savings if you take the time and put in a little bit of effort.
Where to save your money to increase savings
Until recently, another problem people faced when saving for a home was low interest rates on savings accounts. But as the Federal Reserve raised interest rates, so did the rates you earn on your savings. This means that you will earn more interest on your savings, and your balance will grow faster thanks to compound interest. Here are some ways to earn a decent amount of interest while keeping your money safe.
High yield savings account
The best place for most people is a high-yield savings account. You can find endless options online for these types of accounts, many of which now pay more than 3%. The only caveat is not to just choose the bank with the highest rate. Depending on when you look at it, the bank with the highest rate may offer this to attract as many deposits as possible. Then as rates continue to rise, they dig their feet in and never raise rates again.
The good news is that this is less common than it used to be. However, when you find the rate you want, research the bank first before applying. Opening an account online usually takes ten minutes, and you can link your existing bank and make transfers right away.
Certificates of deposit
As with savings accounts, bank certificates of deposit have not paid competitive interest rates for years. But now, those rates are even higher thanks to the Federal Reserve’s rate hike. The best plan of attack when putting your savings into CDs is to build a CD ladder. This is when you divide your savings into equal parts and invest them on different maturity dates.
For example, if you have $5,000, you can put $1,000 into one-year, 18-month, two-year, three-year, and five-year CDs. When the one-year CD matures, you unlock a new five-year CD. When each CD matures, you unlock a new five-year CD. Doing so allows you to earn as much interest as possible.
The only downside to putting your money in CDs is that they stay locked until they mature. If you need the money before it’s due, you’ll usually pay interest for three months as a penalty.
If you haven’t needed your down payment money for a year or more, consider investing in I Bonds. They are government issued bonds with two rates, a fixed rate based on the consumer price index and a variable rate based on inflation. Currently, I Bonds pays 6.89%. Understand that the price changes every six months, so this is not the price you will be earning all the time.
But the interest rate is currently much higher than in savings accounts, so many people are buying I Bonds. If you decide to go this route, you should create an account and purchase the bonds through TreasuryDirect.gov. Also, you can’t sell a one-year bond, and if you sell between two and five years, you lose out on the interest for the past three months. After five years, there is no penalty.
Short-term Treasury bonds
The last option is to invest in short-term Treasury notes. Interest rates on these jumped along with the other savings products listed. With this investment, you can choose different tenures, including maturities of four weeks, eight weeks, 13 weeks, 26 weeks, one year, and more. As of this writing, its yield is around 4%.
The easiest way to invest is through TreasuryDirect. However, you can also invest in the secondary market through a broker, but you may incur a fee for doing so.
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