How to Save for a Down Payment
Rent is getting less and less affordable. According to Zillow, the median asking price of rental property in the U.S. is $1,575 per month, while the mortgage payment on a median-priced ($180,100) home would be just over $850 at the current low interest rates. Even with taxes, insurance, and maintenance, it's tough to make a financial case in favor of renting. In the Washington DC area the costs are obviously much higher than national averages so you have to compare affordability in your areas of choice.
There's no one-size-fits-all answer, and for some situations, renting makes more sense these days than buying. Renting definitely makes sense if you don't expect to be in the home for too long. The only way buying would make better sense in this situation is if you moved and could cover your monthly mortgage payment with a comparable rental payment.
Now is definitely the time to buy in Northern Virginia if you can afford it, although coming up with a down payment can be challenging, especially for younger buyers, so here are some ways to help get you to save up for that large cost.
Reduce Larger Expenses
Any little bit helps. Skipping that morning latte, and opting to make it at home will save money over time, but it is the larger expenses that will make a drastic difference. Rent is more than likely costing you 30% of your take home pay, so try and negotiate a lower monthly rate with your landlord if you are paying a higher than market rate. If that doesn’t work out, look for a cheaper location or even downsize from a 3 bedroom to a 2 bedroom. By eliminating a bedroom you can save on average 30%, depending on the location. Roommates can also reduce your cost of living. Don’t think that roommates are only for those who are straight out of college; in fact, the percentage of adults living with someone other than a spouse is up to 32% nationwide.
Automated Savings Contributions
This is the easiest way to ensure that you are putting a fixed amount of money away before you spend it. Simply tell your payroll department that you want an amount automatically deducted from your paycheck, and deposited into a savings account. The key is to start small, a good number is 2%, and this way you don’t even notice that it is missing, and the payoff will end up significant over time.
Stash the Extra Cash
With tax season in full swing many will be anticipating that check in the mail soon. The average tax refund in 2014 was $3,116; this year it’s expected to rise to $3,295. Rather than buying a big-ticket item, use restraint and deposit it into a savings account. It will be a great investment, and can boost that savings number.
Consider Less for Retirement Temporarily
This is not a suggestion to raid your retirement account, however many people are already contributing the maximum of 6%. If you are one of those, consider allocating a portion of that toward your down payment in a separate after tax account until the purchase of a home, and then go back to the 6% after.
30 year fixed rates are averaging 3.5% currently. For home buyers, lower interest rates are always good news. Add to that a new Zillow report saying that now is a good time for renters to become home buyers. The national average time it takes to break even on rent vs. buy is only 2 years. So if you know that you’ll be staying put and renting for more than 2 years, you’d be better off buying.
Buy a home if you plan to live in it for years. Your home should be a place of safety and comfort, not an albatross. The sooner you can buy and hold, the better, but if it limits your mobility and prospects, you may be better off renting until you're more stable and financially settled.
Are you considering a move in the near future? The Casey O’Neal Team is here to help you before, during, and after the process. Casey has prepared a special report called
“The Ten Dumbest Mistakes Smart People Make When Buying or Selling a Home” that we would like to offer you or anyone you know.
To get a free copy, contact us on the site directly, by email at [email protected], call our office at 703-824-4800 or my cell at 703-217-9090, or visit the office at 5100 Leesburg Pike, Suite 200, in Alexandria.