With the lack of inventory and 30-year mortgage rates as high as we have seen in the past 15-20 years, the American Dream has never felt more out of reach for so many in our country. And while various local, state, and federal programs have helped to make the prospect of home ownership more realistic, purchasing a home still requires a sizeable up-front commitment in terms of down payment, closing costs, and moving expenses. Despite these obstacles, home ownership continues to be an important goal for young people, and therefore it is critical to set forth a path for saving for the purchase.
Buying a home is often the largest purchase a person will make in their lifetime. Saving a sufficient amount for this purchase can seem daunting. But by making a commitment to save, and taking advantage of certain tips and tricks, home ownership may be closer than it first seems.
Here are several tips that could help you on your path to home ownership:
- Set a goal: The first step is determining how much you need to save and when you would like to make your purchase. Then, you can plan how much needs to be saved over that time frame.
- Know your income and expenses: An important step in saving for a home is determining how much is possible to save each month. By having an idea of your income and average expenses, you will know how much ‘extra’ can be socked away for a home. Additionally, perhaps you will determine that certain discretionary spending can be reallocated into savings.
- Get prequalified/preapproved: Getting prequalified and/or preapproved is an important step toward purchasing a home. During this process, a lender will look at your creditworthiness to determine the terms of your loan. This will help you determine how much home you can realistically own. And in competitive markets, having a preapproval letter shows sellers that you are a serious homebuyer and that you have taken steps to obtain financing for the purchase. In other terms, this may increase the odds of your offer being accepted by the seller.
- Automate your savings: Like saving for retirement, oftentimes the easiest way to save toward a home purchase is by automatically deducting a portion of your paycheck into a separate savings account. That way, your savings becomes an unconscious habit.
- Take advantage of higher interest rates: Since the Great Recession of 2008 and until last year, savers were not rewarded for hoarding cash. To make a meaningful return meant taking risk with your money. Thanks to higher interest rates, savers can now earn 3, 4, or even 5 percent in a money market, certificate of deposit, or bond.
- Pay off other debt: Whether it be student loans, car payments, or lines of credit, paying off debt can improve your debt-to-income ratio and may influence the interest rate or amount that your lender is willing to offer. In addition, fewer recurring expenses may free up additional money that can be saved or used to support a higher monthly mortgage payment.
- Take advantage of home ownership programs: There are many programs available to buyers that can ease the burden of buying and owning a home. If you are a first-time buyer, military veteran, or plan to buy in a high cost-of-living, there are likely programs out there that can help make buying a home a reality. Consult with your lender to identify and apply for this assistance.
While purchasing a home is a big commitment, taking advantage of several tips and strategies can get you on track toward making home ownership a reality sooner. Consult with your financial advisor who can help define your goals and determine your best path to buying a home.