5 Creative Ways to Save for A Mortgage Down Payment

When buying a house, your down payment will likely be the biggest upfront cost. And saving for that is a roadblock for many aspiring homeowners. 

Many buyers believe that the only way to afford a home is by paying a 20% down payment. But there are now more options to buy a home with zero to little down payment. This makes it easier to save for a down payment in a shorter amount of time.

Through a combination of creativity and a solid savings plan, it’s possible to be a homeowner sooner than you think. 

We’ve put together a detailed savings plan to help you save for a mortgage down payment.

Smaller Down Payment Vs. Larger Down Payment

A smaller down payment means a higher loan-to-value (LTV) ratio. Lenders see this as a risk and they usually compensate by charging higher interest rates. Paying less than 20% down payment means buying private mortgage insurance (PMI), adding 0.5% to 1% to your loan amount. You’re also at risk of going underwater in case of a drop in the housing market.

A larger down payment, on the other hand, will give you access to lower interest rates which can save you money in the long run. You can also save on mortgage insurance premiums since you don’t have to pay for the PMI. Additionally, you’ll have a safety cushion to refinance or sell your home in the future for a good deal.

While there are advantages to paying a larger down payment, it also has its drawbacks. 

Saving up for a larger down payment may take time, which means entering the housing market at a later time. You’ll also have less cash to fix your new home. And, you’ll have a smaller emergency fund.

Whether you decide to pay for a smaller or larger down payment is your personal decision. Take time to weigh the pros and cons, and go for the most practical choice according to your needs and budget.

1. Determine how much you want to pay for your down payment

Before you decide on an amount, it would help to explore your options on where to get financial assistance for a down payment. Learn your options below.

• Check if you qualify for a Veterans Affairs (VA) or United States Department of Agriculture (USDA) loan

These types of loans require as low as 3% down payment, and in some cases, 0%. But first, you need to check if you’re eligible. Click the links below to find out.

1. VA Loan Eligibility Requirements
2. USDA Loan Eligibility Requirements

• See if your area offers First-time Homebuyers Program

Some cities offer first-time buyer programs that will make it easier for new home buyers to buy a home by providing them interest-free loans. To check, go to your city hall and inquire about their housing programs. Or, you can visit First-Time Homebuyer Assistance Programs to see the available grants and loan programs in different cities and counties in the US.

For a more detailed discussion on other down payment options and how you can qualify to buy a home, you can read this article.

Down Payment Formula

After checking if you qualify for any of those programs above, you can now gauge how much you want to save up for a mortgage down payment. To determine that amount, you can use this down payment formula: purchase price X percentage down = amount of DP to save.

Let’s say the median home costs $300,000 in your area and you want to pay at least a 3% down payment. Multiply $300,000 by 0.03 and the product of $9,000 is the minimum amount you need to save. 

If you aim for a 20% down payment, following the same formula above, you’d need to save at least $60,000.

2. Set a timeframe to buy your house and create a monthly savings plan

How long it’ll take you to save for a down payment is entirely up to you. But you have to set a timeline so you can create a concrete monthly savings plan. With this, you can set specific values and also measure your progress.

For instance, you’ve decided to buy a home in the next 24 months and you need to come up with a 20% down payment. 

You can use this formula to determine your monthly savings goal: down payment amount/number of months = monthly savings.

Using the same example above, 20% of a $300,000 home will be $60,000. Divide that into 24 months and you’ll get $2,500 which is the amount you need to save on a monthly basis.

If this amount is realistic, then stick with it. Otherwise, you can do any of these three things: adjust your timeline, lower your expenses, or increase your income.

3. Cut down on your expenses until you reach your savings goal

The best way to reach your target monthly savings goal is to boost your income. You can achieve this by picking a side hustle. A side hustle can be anything from selling stuff, renting out your spare bedroom or parking space, or offering your services during your free time.

According to Monster.com, some of the top-paying side hustles are driving for Lyft or Uber, working as a coach or fitness trainer, freelancing and consulting, dropshipping or e-commerce, teaching or tutoring, selling online, babysitting or caretaking, etc.

5. Automate your savings plan to ensure you stick to your plan