Saving for a down payment on a home in times of inflation

Ownerly

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Landlord unlocks the house key for new home(shutterstock/shisu_ka)

If you’re thinking about buying a home, in the U.S. or abroad, having a sizable down payment can save you money in the long run. It not only saves on interest fees, but having at least a 20% down payment can prevent added costs for private mortgage insurance (or PMI).

PMI depends on your loan-to-value ratio, and when that ratio is too high, a lender considers your loan as a riskier investment and tacks on PMI. This additional cost is roughly 0.25% to 2.25% of your mortgage balance annually, which adds up to a hefty bill on top of your principal, interest, taxes and insurance.

Saving for a down payment sounds like a great idea, but it is no small feat. We’re talking about $89,400 if you purchase a home at the nationwide median list price of $447,000, as of the time of this writing.

This would mean saving roughly $1,500 every month for five years straight. Going through the mortgage pre-approval process can help you understand how much house you can afford.

We’ve come up with some ideas to help make it faster and easier for you to save for a down payment and buy a home.

Look into down payment assistance options

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Down payment assistance written on a model of home.(shutterstock/Vitalii Vodolazskyi)

Down payment assistance programs come in many forms—some state and local governments and nonprofits offer loans or grants, an employer may offer down payment assistance, and even some builders may offer down payment assistance during a promotion. Search online for down payment assistance options in your area, and ask your real estate agent for any available information on down payment assistance programs. Keep in mind these local programs are usually reserved for first-time home buyers, but they can provide the boost you need to purchase a home.

Obtain funds from a 401k, a gift or crowdfunding

Some buyers withdraw money from a 401k or other retirement accounts to build up money for a down payment. If you take this route, just be sure to inform yourself of any tax implications or fees you may incur as a result. Generally, this is not advised because tax policy is structured to deter this. If you have family or friends who owe you cash or want to help out, you can use gift money as a down payment. The lender may just need to verify the funds are in fact a gift and not a loan, and you should be able to get up to $16,000 tax-free in 2022. Crowdfunding is yet another way to build up down payment funds, and there’s even a site called homefundit that’s made for just that purpose.

Write up a strict budget and cut unnecessary expenses

One of the best ways to save money without making more money is to simply write out a detailed budget that includes your monthly earnings and spending. Many banking applications allow you to search and export your purchases, so you can track exactly what you’re spending and where. This way, you can see any areas you’re spending in excess.

“On the savings side, consider a moratorium on restaurant meals until you reach your down payment goal,” said Brian Davis, Founder at SparkRental. “That includes not just dinners out, but also delivery, take-out, lunches that you didn’t pack yourself, and any other meal not prepared by you. Food is the third largest spending category for the average American household, per the BLS, so it offers plenty of room for saving money.”

One of the best ways to budget your money is to create an excel sheet: Add up your earnings and subtract all of your monthly bills that are absolute necessities (think house payment, car payment, insurance, phone, internet, utilities, grocery and any work-related expenses). After you subtract your monthly necessities from your monthly earnings, you’ll have an idea of how much money you have leftover.

If your leftover cash is going to non-necessities like regular takeout or nights out, you can reduce some of those expenses and add a monthly savings amount into your budget. Have this savings automatically go into a separate account, and consider this money untouchable.

Get a side hustle

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Side gig message with money money on a computer keyboard with sticky note for your making money message(shutterstock/karen roach)

Another way to save money for a down payment on a home is to simply add more income to your household. The easiest way to do this is via a side job—providing Uber or Lyft rides or selling something you create on Etsy, for instance. There are so many ways to earn extra cash online in 2022, from sites like Fiverr to TaskRabbit, you can easily make more with a little hard work and creativity.

Maybe you have a talent for building tables, maybe you’re an excellent book editor, or perhaps you’re excellent at hanging flat screen TVs? These are all tasks people are willing to pay for.

Sell unneeded items

Look around your home for electronics, antique items, designer clothing or handbags, unique artwork or anything that might be of value that you’re no longer using. These items might just bring you the cash you need to get you closer to that down payment.

In addition to the standard auction sites like eBay, you can also find niche sites like Poshmark or ThredUp for clothing, Gazelle for electronics, and Etsy or Threadless for artwork.

Invest your money

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The stock market has taken a downturn in 2022. The Nasdaq is down more than 25% over the last six months, and the S&P 500 is down about 20%, as of this writing. However, if you have some cash to invest, you can still take advantage of high-yield savings accounts, CDs, index funds, put options, short sale stocks, and other strategies that can make you money—even in a down market.

If you’re planning on investing in such a risky market, however, keep in mind there are virtually no guarantees when it comes to investing (especially in stocks and options), and you should only ever put up money you can afford to lose.

Put down a lower down payment

If you’re having trouble saving the full 20% for a down payment, you might want to consider a lower down payment option. If you’re eligible for a VA loan, you could be able to get away with paying no PMI and as little as zero down payment.

Even if you’re not eligible for a VA loan, you still have options. You can seek out a “piggyback loan,” which basically says the buyer only needs 10% down because the other 90% of the loan is covered by two separate loans.

Many creditworthy buyers, especially first-time homebuyers, are eligible for programs that allow them to reduce the amount of down payment they have to put out. You can put down as little as 3% on a conventional loan or 3.5% down on an FHA loan and just pay for the cost of PMI. If you’re eligible for a USDA loan, you could even end up with no down payment.

However, you should always factor any PMI costs into the equation, along with other common expenses that first-time homebuyers overlook. Taking on PMI fees is only a good option if home values in your area are rising fast enough to outweigh the added cost of PMI.

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