If your goal is to put 20% down on a home, which could not only help you lock in a lower rate but would likely eliminate the need to purchase expensive mortgage insurance, here’s a five-step strategy to follow:
Start by making a budget. Then calculate the mortgage amount you can afford. Ideally, mortgage, property taxes, and homeowner’s insurance should not exceed 28% of your gross monthly income.
Once you’ve figured out your financial position, you can set a down payment target. For example, if you can afford a $200,000 home, you’ll need to save around $40,000 for a 20% down payment.
Having a time frame will give you an idea of how much you need to save each month. If you want to buy a home in five years, with a down payment of $30,000, you’ll need to save about $500 a month.
You can save extra money by either reducing your expenses or increasing your income. The easiest place to start is by reviewing your budget to decrease expenses. Separate your expenses into needs and wants.
Put your savings on autopilot by having a certain amount of your paycheck go directly into a savings account. It’s tempting to invest money in stocks or mutual funds, which have the potential for a higher return.