Down payment

One key to saving for a down payment: Establish an online banking account designated for the purpose.

First-time homebuyer wannabes wrongly think they need to make a big 20% down payment. In fact, there are plenty of ways to qualify for a mortgage with a down payment of less than 5%.

That’s more doable, right? If you’ve got your eye on homes priced in the range of $250,000 or so, you’re talking about needing less than $12,000 for a down payment. In higher-cost areas the $30,000 to $50,000 needed is a bigger ask, but just a few years of determined saving can get the job done. That’s going to require a strategic down-payment saving plan.

1. Open a savings account at an online bank. Any money you plan to use within, say, five years or so doesn’t belong in the stock market. Way too risky. The best place for savings you intend to use for a home down payment in the next few years is a bank savings account. Sure, you aren’t going to get shoot-the-lights returns, but what matters most is that the money stays safe and sound so it’s there when you need it.

But not any old bank. Traditional banks — called brick and mortar — pay lousy rates on savings accounts. They are pretty much betting on lazy clients not noticing. That’s not going to be you. As I’ve reported in more depth, just as safe as traditional banks but offering much better interest rates, are online banks: rate.com/research/news/internet-savings-banks. In early 2019, it was easy to find online bank savings accounts paying about 2% or more, compared to less than 0.05% at the major traditional banks.

Tip: If the online savings bank offers a feature where you can “name” your account, give it a name that will motivate and inspire. MyFirstHome. MyYesICanDownPaymentFund. NoMoreRenting. Whatever floats your boat. Academic research has shown that when we name accounts, we’re more likely to stay committed to using them for their intended purpose.

2. Make saving automatic. You can link your checking account with your new online savings account, and for no fee set up a monthly transfer from your checking account to your savings account.

Making your down payment saving automatic is the secret to your home buying success. Rather than relying on your memory to set aside money each month, or talking yourself into staying committed, an automated system will keep you on track.

3. Set a high savings bar for yourself. How much to save each month is, of course, an entirely personal decision. But it’s not just a function of what you earn. The hard truth is that if you are determined to buy a home, you can likely save plenty by being more careful about your spending.

Try this: Right off the top of your head, name a monthly amount you can save in your down payment savings account. Now raise that by 25%. Yep, 25%. Before you decide that’s a deal breaker, spend a few minutes reviewing the past few months of your bank and credit card statements. You’re sure you can’t manage to spend a bit less on certain things? Dining out, the gym membership you’re not using, or perhaps downscaling to a less expensive car with a lower loan payment?

Besides, what tends to happen is that once we make the big step of committing to a monthly savings contribution — be it for a mortgage down payment or a retirement account — we adjust to having less money in our checking account.

4. Earmark found money for your account. If you get a raise, bonus or manage to bring in some extra cash with a side gig, make a promise to yourself that you will save at least 50% of your after-tax haul for your home down payment. Or 100%. Having a clear intention for what to do with “extra” money is the key to not frittering it away.

One caveat: If you have high-rate credit card debt, that’s worth tackling hard. It never makes sense to pay high interest and getting your card balances paid off will help you qualify for a mortgage. You can read more of my advice on handling a raise or bonus: rate.com/research/news/five-ways-to-make-the-most-of-a-bonus-raise-or-tax-refund.

5. Put your goal in writing. Write yourself a contract or letter that spells out what your goal is with this account. Be specific: “I am going to save at least $X a month, and I intend to have enough for a down payment within Y years.” Sign and date it. And keep it nearby. If you ever find yourself wavering, pull it out and think about how good you felt when you wrote your home buying manifesto. Academic research has shown that sometimes the seemingly simple act of writing something down can be a powerful “pre-commitment” that keeps us focused on goals.

Saturday, November 16, 2019
Thursday, November 14, 2019