The only right way to save money for a house
- Saving money for a house can be hard in today's world, where it can take nearly a decade to save up a 20% down payment.
- However, how much down payment you need for a house can be lower with first-time homebuyer programs.
- The key to saving money to buy a house is being strategic with your goals, cutting back on rent, and putting the money in low-risk investments.
With millennial homeownership at an all-time record low, saving for a home can seem like an impossible feat.
Millennials buying their first home today will pay 39% more than baby boomers who bought their first home in the 1980s. And, depending on the city, it can take nearly a decade to save money for a 20% down payment on a house.
So, what's a millennial to do?
First thing's first, be strategic about your goals
Some mortgages allow for lower down payments than the typical 20% down payment, so you may not need to save as much money as you think. For example, if you have a credit score of 580 or higher, you may be eligible for a mortgage with a down payment as low as 3.5% with an FHA loan.
You can also check and see if your state has a first-time homebuyer program, which offers smaller down payments as low as 3%.
Once you know how much you need to save, it's only a matter of having - or even finding - the money to save.
You can find extra money to save by cutting back on your rent
"Your rent is your single largest expense, so keeping it as low as possible frees up money to save," said Business Insider's Lauren Lyons Cole, a certified financial planner.
For example, if you can afford to spend $1,500 a month on rent, choose a simpler, lower-priced pad that will run you $900 or $1,000 a month. That gives you $500 to $600 extra to put away every month. If you tuck it away for a year, that's as much as $7,200 saved.
For five years, that's $36,000 - more than enough for a 20% down payment on a $150,000 house and almost enough for a 20% down payment on a $200,000 house (and that's not counting interest, but we'll get to that in a minute).
Of course, there are other ways you can save, such as tucking your yearly bonus or tax refund away into savings instead of spending it. The average tax refund is $2,800 - after five years, that's an extra $14,000 saved.
You can also do the same with a raise at your job. If you earn $40,000 annually and get a 3% raise, that's an extra $1,200 in extra income you can save, according to Cameron Huddleston of GOBankingRates.
But living below your means - quite literally - in a place with less rent than you can actually afford is key to saving more at a faster rate.
Put your money in low-risk investments
When you have money to save for a house, don't put it in your regular bank savings account, which offers a typical interest rate of .o1% to .06%. Instead, it's best to put the money in low-risk investments, according to Cole.
Luckily, there are several low-risk investment options that offer above-average interest rates depending on what suits your needs.
You can opt for a money market account, which allows you to earn interest and withdraw money on short notice, or a CD account, which offers even higher interest rates. The catch of the latter is that you can't withdraw your money for a predetermined period, from a few months to a few years depending on the account you open, according to NerdWallet. However, if you're saving for a down payment for a specific set of time, such as five years, this is a good option because it comes with a guaranteed return.
These both typically require a larger minimum deposit. If you don't have much money to deposit initially, a high-interest savings account, which also offers above-average interest rates and can provide a high return, can be a good option. For example, Barclays offers a 1.65% and Ally Bank offers 1.6%.
And then there's your Roth IRA. Surprise! It's good for more than just retirement. If you're buying for your first home and are under the age of 59 and a half, you can withdraw some of your Roth IRA earnings without a penalty up to $10,000. However, the money must be used to pay any associated costs within 120 days of receiving it.
And if you don't take advantage of this penalty-free withdrawal, that's all the more money you have for retirement.