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4 steps to help you save for a down payment

By Guest Blogger(view all posts by Cheryl.Lock)
at 6:00AM Thursday February 28, 2013
under Personal Finance

One of the hardest parts of buying a house is saving for the down payment. Most down payments are anywhere from 10 to 20% of the total house price, and the more money you can put down for a down payment, the less interest you'll pay over the course of your mortgage.

Saving that much money can be hard, of course, but not impossible. Here is a step-by-step guide to get you off on the right foot.

1. Determine How Much You'll Need
It's hard to start saving for a goal if you don't have a specific number in mind. This step will require a little bit of research. You'll need to start thinking about how much mortgage you can afford based on your current income and living expenses, as well as what type of house you'd like, and where. Something to keep in mind: most experts agree that mortgage payments shouldn't take up more than 28% of a person's monthly take-home pay. Online calculators, like this one from Zillow, can help you determine how much you'll need for a down payment, and what your monthly payment will be based on current mortgage rates.

Once you have a good idea of how much mortgage you can afford, figure out what 20% of the total price will be (to be on the safe side), and set that number as your down payment goal.

2. Set Up a Specific Savings Account For Saving
Setting up a savings account specifically for your down payment goal will give you confidence as you watch it grow every month, and it will help deter you from stealing from that account to fund other activities or splurges.

Depending on how much you decided you needed for a down payment, and when you're hoping to move, it might be a good idea to look into saving for a down payment in a Certificate of Deposit account (you can calculate the interest you will earn over time in a CD here) or even into a traditional investment retirement account (calculate the interest rate of an IRA here).

Keep in mind that you shouldn't put money into a CD or an IRA if you expect to use that money in five years or less, so setting a timeline will be important before you determine the best way to save for your down payment. Traditional IRAs allow first-time home buyers to withdraw up to $10,000 from their accounts without the usual penalty fee, but read the fine print on any account before you open one to start saving for your dream home.

3. Set Up Reoccurring Payments
Once you've determined how much money you need and have a general idea of how long you'd like to be saving, you can figure out how much you need to save each month in order to reach your goal. (You may go back and forth between Step 2 and Step 3 a couple of times, since your timeline and how much you can put away each month are pretty intertwined. For example, if you'd rather move into your new house in three years, you'll need to figure out a way to save more aggressively in those three years as opposed to stretching it out over five or so years of saving.)

Go through your budget line-by-line and figure out where you can scrimp and cut back in order to siphon money into your down payment account instead. Let's say, for argument's sake, that you wanted to buy a house that cost $100,000, and you wanted to put down a 20% down payment. That means you would need $20,000 in savings before you could buy your house. If you wanted to purchase that house in five years, you would need to find an extra $333 per month to put in savings. (If you're waiting at least five years, though, you could be earning a nice interest on your money if you put it in that CD or IRA we talked about before, so you could have your nest egg sooner than expected.)

Work with your monthly budget and your timeline until you come up with something that fits in both.

4. Ask Others to Chip In
Once you're on your way to saving, consider having others chip in for special events, like birthdays, anniversaries and the holidays, in lieu of regular gifts. Sites like Deposit a Gift make it easier than ever for friends and family to gift you cash directly towards your goal … which you'd probably appreciate a lot more than that third set of engraved wine glasses.

Cheryl Lock is a personal finance writer at and former editor at LearnVest and Parents magazine. When she's not writing, she enjoys travel, which she blogs about at wearywanderer.wordpress.com.

(Source: Savings.com)