What is the best way to save for a house?
Buying a house means saving for a house. And “saving” is something many Americans have historically found challenging—as children, teenagers and even now as adults.
Suffice it to say, that old piggy bank relegated to your closet can’t help you now, no matter how many coins you stuffed inside it during childhood. Buying a house calls for a sizable, upfront investment, one that is typically dependent on personal savings collected over many years. And that’s just a part of the overall mortgage costs you’ll be responsible for in the years to come. If you do not know how to save money, you’ll need to learn pretty quickly.
But hey, this is no time to fret about a lean bank account or worry about your “savings IQ.” If you plan to buy a house and get a mortgage in the next couple of years and have ample income and assets, you’re already halfway there. Just take a deep breath and know that with a little time and discipline you can begin to plot a workable path towards viable home savings. That down payment that you’ve heard so much about? It’s within reach.
In the paragraphs below, we'll go over some everyday strategies to help you save money, specifically how to save money for a house.
Homebuying 101: Down payment
When people say they’re saving to buy a home, what they’re really saying more than anything else is that they’re saving for their down payment. Naturally, that’s just a portion of the overall cost of buying a home, but it looms large in the minds of homebuyers—especially first-time homebuyers.
This is also a good time to clear something up: While most people getting ready to buy a house think they need to secure 20% of the sale price as part of a down payment, that’s actually not true in most circumstances. In fact, according to recent reports, 9% is the national average for down payments from first-time homebuyers these days, and 19% was the average for repeat buyers. If you qualify for certain first-time homebuyer programs, you can get away with as little as 3% down. Getting a VA or USDA loan? You may be eligible for zero down payment options.
Now, we’re also not saying don’t put 20% down. Conventional wisdom has a lot going for it, including the fact that a 20% down payment will save you from having to procure private mortgage insurance (PMI). The cost of PMI can set you back anywhere from 0.5%-5% of the cost of the original mortgage loan per year until you reach 20% total down payment, at which point PMI is no longer necessary.
But getting back to how to save for a house: Regardless of the size of your down payment, you will need to formulate a workable strategy to set money aside and place it into a savings account. Let's run through a few ideas on how best to make this happen.
8 steps to start saving money for a house
- Begin the begin
- Create savings goals and design a budget
- Take a look at existing debt and current expenses
- Change your current living situation
- Put a pause on your IRA and 401(k) account
- Look into a side hustle/part-time job
- Explore the share economy and renting out space
- Consider savings apps and high-interest accounts
1. Begin the begin
You may be wondering how it’s possible to save for a house before you even begin seriously searching for one. It’s a valid point. However, for the savings process to get off the ground you have to begin somewhere, so at this point don’t worry too much about home price, affordability or exactly how much to save for a house. To be perfectly frank, critical housing market information—interest rates and home prices especially—are bound to change quite dramatically over the months as you sock away money and think about your dream house. The important part right now is to establish some muscle memory when it comes to savings. Let accrual and fierce commitment to your stated goal take care of the rest.
While you’re at it, ask yourself what is the best way to record important information: Is it on a whiteboard? Post-It notes? Smartphone reminder apps? Maybe it’s simply writing things down in a notebook that you’ll refer to later. Once you’ve chosen the appropriate tool, make sure you get your home savings goals out of your brain and down on paper or the digital equivalent. This is the first and arguably most important step in what will likely be a years’ long journey in saving for a house.
2. Create savings goals and design a budget
So what’s your goal? Whether it’s $50,000, $10,000 or $100,000, just get it down in writing. Being able to look at it makes the goal of saving money less formidable and more realistic.
Secondly, divide your savings goal by the number of years in which you want to accomplish it. Each year should represent how much you need to bank on an annual basis to buy a house. Think into the future—when do you want to become a homeowner (and more importantly, when do you think you’ll have the necessary funds to be one?). Is it it two years...is it five years? A five-year savings plan for a $50,000 goal would mean saving $10k a year. Can you do that?
Now take this approach one step further. Divide your year savings goal by 12 (as in 12 months in a year). Doing this further divides the uphill march toward your savings goal and casts it in more approachable terms. If your goal is to save $50,000 to use for down payment and other housing-related costs (origination fees, closing costs, etc.) then it might be more manageable to see it in terms of a monthly goal.
Savings Example
A sample list of goals may look like the following:
- Estimated home purchase price: $250,000
- Necessary savings: $50,000
- Number years to save: 5
- Yearly savings amount: $10,000
- Monthly savings amount: $833
Sure, $50k might seem like a lot of money right now as a first-time homebuyer. But if you can break it down into yearly and then monthly increments, it will seem less intimidating. If you need to adjust further, then by all means do. This is just a general approach to get the ball rolling. But make no mistake about it: Setting a budget and sticking to it is a critical step towards home ownership.
3. Take a look at existing debt and current expenses
It can be hard to save for a house when your recurring debt is high and your income barely covers existing expenses. While it’s true that recurring expenses will be closely examined by your lender at the time of your mortgage application, at this juncture your primary focus is not loan approval—but what you can do to maximize savings.
Lump sum payments
Can you find a way to pay off your credit card debt or make a lump sum payment to drastically reduce your auto loan or student loan? These are the kind of debts that can follow you for years and prevent you from achieving a clear pathway to home savings. Hence, the lump sum. It can quickly and decisively help you reduce your debt, enabling future cash flow to go toward a home savings account.
Nonessential expenses
Ask yourself: Are there any expenses that can be weeded out or somehow reduced? Is there nonessential spending that can be tamped down or eliminated altogether? What about online impulse buying and those ever-expanding streaming services? Surely, some (if not all) can be sacrificed in the pursuit of home savings.
If nothing else, there may be opportunities to select a less expensive cell phone plan or a basic Wi-Fi contract. Yes, you may have to suffer the indignities of less storage and slower access speeds, but think of the total goal.
These minor inconveniences are just temporary, but the savings recouped from eliminating or reducing a few monthly expenses or paying off old loans can help you free up more money that can be transferred into your home savings account.
4. Change your current living situation
There’s nothing that says you have to save for your future home while living in your current abode. Want to generate some real savings to help you buy your first home? Downsize.
While it’s not always feasible for every homebuying candidate, for those who can move to a smaller, less expensive apartment or house for a couple years, the savings can be dramatic.
Let’s say you're currently a renter, living in an apartment that costs you $1,800/month. If you could cut back on the amenities (and let’s be realistic, size), then you might be able to swing a suitable apartment for perhaps $1,300/month—$500 cheaper! That’s an enormous savings—likely larger than anything you could obtain from reducing other bills and payments.
Is there a certain self-sacrifice involved in this mission? Absolutely, especially if you have a spouse and/or children. However, if you have your eyes on the prize when it comes to saving for a house and ultimately reaping the rewards of home ownership, then this temporary sacrifice in creature comforts could well be worth it.
5. Put a pause on your IRA and 401(k) account
We certainly don’t recommend this over the long term, but for a couple years it might very well benefit you to stop directing cash into your retirement accounts and instead put it into your home savings account. It’s certainly a personal choice, but in doing so you free up precious funds that can quickly add up and decrease the time spent saving toward your goal.
Some employees set 401(k) triggers at 5-10% of their paychecks—that's a lot of money that can be redirected to help you with your homebuying journey. IRA accounts max out at $6,000 ($7,000 if you’re older than 50), so it’s pretty clear how that amount could be redirected toward your home savings account. And, of course, once you achieve your home savings goal—even if you still have yet to finalize your home purchase—feel free to return to your retirement savings and build for a prosperous future.
6. Look into a side hustle/part-time job
OK, you’ve doubtlessly heard a lot about side hustles and gig workers these days. While the terms might be relatively new, the concept is not any different than what people have been doing for generations to make ends meet: Get a part-time job.
In the era of the “share economy” a number of things come to mind, but perhaps none more notable than driving for rideshare companies (Uber, Lyft, etc.). While they certainly have their critics, it’s the kind of hustle that might be manageable around your day job and could quickly add significant funds into the coffers to help you get aligned on your home savings goals.
Of course, if you have a computer (and who doesn’t) you could easily turn your writing or design skills into extra money as well—all from the comfort of your current home. It’s easy. And while any side hustle almost by definition will impinge upon your free time, it will accelerate your home savings goal, which is the whole idea, right?
7. Explore the share economy and renting out space
Another potential part of the share economy ripe for monetizing is that of existing space—your space.
Rent out your home
Renting out rooms to guests is a great way to bring in extra cash for home-saving purposes. Call it the Airbnb approach. And while this concept, too, has been around for ages, digital access has made the process of both renting out rooms and receiving payment virtually seamless.
If you reside in a safe area with easy access to public transportation and have a large enough living space for the occasional guest to come and go without impacting your home life, renting out your space—at least some of it—could be an option.
According to many hosts, it can be virtually painless to have a paid guest down the hall while you go about your everyday life. If that notion doesn’t quite appeal to you, you could consider the option of renting out your entire dwelling and go stay with friends and family for a few days. Hospitality services make it easy to customize arrangements and get that extra cash to you quickly.
Rent out your parking space
Don’t have the room or inclination to rent out your current home? No worries; there’s another way to make money when it comes to your location, especially if it’s in a desirable urban area where space is at a premium. Yes, we’re talking about parking spaces. Many apartments come without a parking space and your neighbors may be willing to pay for yours. If you have one, this could be an extremely easy way to collect anywhere from $50-$200 dollars per month, depending on the precise location and how safe and secure it is.
8. Consider savings apps and high-interest accounts
There are ways to generate cash and there are ways to cut down on expenses, but at the end of the day there needs to be a purposeful method to put money into an account earmarked for your new home. That’s the role of savings. But the status quo approach to savings—such as cutting out needless expenses—hasn’t always worked, even when supported by simple yet convincing arguments.
For example, numerous financial experts have referred to what’s known as the “latte factor” to illustrate the idea that significant savings are readily within our grasp. In case you’re unfamiliar with the notion, it goes something like this: Rather than forking over $5 a day on upmarket coffee, you could cut out the high-concept caffeine and instantly save over $1800/year. Sounds good in theory but that’s not usually how people work. They like their treats and they like their conveniences, and they don’t like to rashly give them up. That’s where money-savings apps come in. They can make the whole process painless and effortless.
Automatic savings apps
Without getting too granular on the relative pluses and minuses of each offering, let’s just say that there exists a number of money-saving apps that can be downloaded to help take the pain out of savings and make it easier to pay for that mortgage down payment. Essentially, there are algorithms at work that divert small increments of money from your checking account at regular intervals and move them to the app for safekeeping until you meet your savings goals. Because it’s automated, the hope is that you’ll hardly notice the activity or feel the pain—but will greatly appreciate the gradual buildup of your in-app savings.
One caveat: Many of these apps are not ideal places to save for big ticket items like homes because many do not offer substantial savings rates. So be to check around and compare offerings.
Online savings accounts
You may also want to consider opening up a high-interest online savings account. While this sounds a tad conventional, there are some online banks that offer surprisingly high rates. Same goes for money market funds. If you already have a chunk saved, it could be a sound idea to stow some of it in one of these types of savings institutions and have it appreciate while you look for other ways to add to your home savings account.
In conclusion
Saving for an expensive purchase such as a new home is never easy. But It doesn’t necessarily have to be hard. At least not world-historic hard.
While there is unfortunately no single way to guarantee that you’ll master the time-honored art of home savings, we’ve done our best to compile a robust list of some useful ideas that can assist you when it comes to buying a house. Consider this your eight-point home savings tutorial. A few hacks, a few seasoned methods and a whole lot of emphasis on the total goal: amassing several thousand dollars in hopes of using it one day in the not-too-distant future for the purposes of financing a down payment on your house and taking care of other mortgage-related costs.
When you think you’re ready, head out to the open houses, contact a savvy real-estate agent for guidance and make sure to enlist the services of a trusted and knowledgeable loan officer to get a head start on the mortgage process and get a better sense of how much of that savings you’ll actually need to tap into on closing day.