Buying a home is still the American dream for many people but with home prices going up and up, how can you save up for a house without sleeping in your car? With the median home price in the U.S. at $188,900, it seems impossible. How the hell does someone save up for a house?
It’s the American Dream
Buying a home is such a part of the American dream. It seems like once you reach certain milestones that are considered part and parcel of being an adult, every which way you turn, someone or something is telling you to buy a house, you must buy a house! But should buying a home still be a part of the American dream?
The dream of home ownership was something that came after World War II when everyone came back and they built all these houses. Homes came to represent personal success and security, an ideal real estate and mortgage agents perpetuated.
It’s good for the economy to buy houses, but that doesn’t mean it’s actually good for the person that buys it.
Home prices in Boulder, Colorado are up roughly 69% over the past ten years and up around 43% in Hoboken, New Jersey for the same period. With so many people struggling with credit card, student loan, and medical debt, how does anyone save up the 20% down payment?
Is buying a home still a good idea and if it is how can you save for a house?
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Do You Really Need 20% Down?
You can certainly buy a home with less than 20% down. Through an FHA loan, you can do it with just 3.5% down. But should you buy a home if you don’t have 20% for the downpayment?
No, you shouldn’t. Without 20%, you’re going to be stuck paying PMI, primary mortgage insurance. PMI typically costs from 0.5%-1% of the entire mortgage amount on a yearly basis.
You can ask your lender to remove PMI when the mortgage has been paid down to 80% of your home’s original appraisal value, and once the mortgage balance is down to 78%, the lender is required to remove PMI.
PMI isn’t the only reason at least 20% down is ideal. A bigger down payment means a smaller monthly payment and paying less interest over the life of the loan so putting 20% down saves you money in the long run.
There is a workaround though, and it’s called a piggyback loan. Your first mortgage is for 80% of the cost of the home, a down payment of just 10% is made, and the remaining 10% comes from a second mortgage loan that comes with a higher rate of interest. This strategy allows a buyer to avoid PMI.
Hidden Costs of Buying and Owning a Home
It’s not just the down payment you need though. People feed their numbers into a mortgage calculator and see that they could be paying the same or sometimes less each month for a home than they are for their apartment.
Those calculators don’t tell the whole story though. There are a lot of hidden costs in buying and owning a home. Inspection costs, closing costs, property taxes, and maintenance are just a few of them.
A much more realistic calculator is this one from the New York Times. Plug your numbers in the NYT calculator and then a generic mortgage calculator and see how different the numbers are.
I did that. The generic calculator showed my only cost as the downpayment which was $33,700 (10% down) while the NYT calculator showed me the upfront costs which included the same down payment but also other costs like PMI, property taxes, and closing costs bringing the number to $47,180.
The Right Time to Buy a Home
There isn’t a right or wrong time to buy a home. It’s more that there are right and wrong conditions under which you might consider buying one.
Are you planning on a significant life change in the next ten years, like a marriage, a divorce, having a first child or another child, going back to school, or moving?
Because ideally, you want to stay in a home you buy for at least ten years; if any of those things are or may be in the offing for you, it’s definitely not the right time to buy a home.
No one can predict what will happen to the economy but are the signs of things like a coming correction, are banks handing out mortgages like Halloween candy as they were in the run-up to the 2008 crash, is the current president alienating our economic partners and threatening trade wars on Twitter?
If all signs point to “Yes” it might be better to sit it out and see what happens.
Do you still have credit card or student loan debt? If you do, it’s ridiculous to add more debt into the mix.
Are you married and planning to start a family soon? Are you happy in the city you live in? Do you have a steady career that provides a good income? Are world leaders acting like grown-ups and playing nicely with one another?
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How To Save Up For A House
Just because the time and conditions aren’t right for you to buy a house at the moment doesn’t mean you can’t save up for a house right now.
First, you have to know your numbers and be realistic about them. If you make $60,000 a year, you can’t afford a $500,000 house even if a bank will loan you the money. Use the 30% guideline; your housing expenses should be no more than 30% of your income.
It's not how big the house is, it's how happy the home is.
Tweet ThisNext, decide your timeline. Do you want to buy a home in the next two years, five years, ten years? Take your 20% down payment number and add another 10% to it, closing costs alone can be between 2-5% of the purchase price, so an additional 10% isn’t being unrealistic.
Divide your 30% down payment number by the number of months in your timeline, and you have your goal.
Make More
Making more money is generally more impactful than saving money, and this isn’t an extra $100 you need, it’s tens of thousands, so clipping coupons and not buying Starbucks isn’t going to get you there.
Ask your boss for a raise but be prepared to show why you deserve it. If you don’t get a raise or enough of a raise to make a real difference, start looking for a new job. The average raise is just 3% while the jump in income when you change jobs is a much better at 10-20%.
Everyone should have more than one source of income, and that is undoubtedly true if you want to save up for a house. Use your weekends and evenings to make extra money by driving for Uber or babysitting.
Even making a few extra bucks with Survey Junkie or Ebates in your downtime can help you reach your goal.
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Spend Less
Yes, making more is generally a faster way to save up for a house but spending less is still something you should work on. Even if you’re not trying to save up for a house, spending less money is good for you.
The first step is always to make a budget if you don’t have one. A budget doesn’t stop you from spending money but it does show you where your money is going so you can plug any spending leaks.
There are plenty of ways to save up for a house that are pretty painless. Let Billshark lower the rates you’re paying for things like cable, internet and cell phone bills. Use Trim to cancel subscription services you forgot about or don’t use.
When you go out to dinner (which you should cut back on when you’re trying to save up to buy a house!) use Seated to make your reservation. When you complete the reservation, you’ll get a $10-$50 gift card to Amazon, Lyft, or Starbucks.
It would help if you used Seated when dining out. Every time you complete a reservation (book ahead or walk-in), you get up to 30% back. Use your rewards on in-person experiences or redeem for gift cards with brands including Amazon, Uber, and Target. Laura and I almost exclusively eat out with Seated because it saves us so much.
We’ve written about ways to save on everything from gifts to food to dates.
Where to Park Ya Money
Where should you keep the money you’re saving up for a house? It depends on your timeline. Any money you are saving to use in five years or less should not be invested. While investing is safe over the long term, it can be risky in the short term.
Short-term money should be kept in a high yield savings account or a CD. Check out CIT Bank. Their savings account offers an interest rate of 1.55%, and they offer a 13 month CD at 2.25% APY and an 18 month CD at 2.50 APY.
If you plan to wait more than five years to buy a home, you can invest the money, so it’s not languishing for years making nearly any interest.
Should You Do It?
We’re not telling you not to buy a home. Andrew and Laura have done it, and it’s been a good thing for them financially. Matt has done it, and it has not been a good thing for him financially, even ten years later.
We just want to give you a more balanced picture. Buying a home isn’t something you should do because other people are telling you to do it or because you think it’s the next thing you need to check off your list of things grown-ups do.
Run the numbers and make sure they add up in your favor and that buying a home makes sense for the place your life is in.
Show Notes
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Candice Elliott is a substantial contributor to Listen Money Matters. She has been a personal finance writer since 2013 and has written extensively on student loan debt, investing, and credit. She has successfully navigated these areas in her own life and knows how to help others do the same. Candice has answered thousands of questions from the LMM community and spent countless hours doing research for hundreds of personal finance articles. She happily calls New Orleans, Louisiana home-the most fun city in the world.
