Inflation, which we’ve all been feeling the pinch from over the last six months, has a powerful influence on where mortgage rates go. And historically, when inflation eases up a little, so will mortgage rates.
That’s the good news, but when you add in the remarkable pandemic-related increase in home prices and that the US still has a very tight housing inventory, things can feel a little apprehensive — unaffordable, even — especially for first-time homebuyers.
According to a Fannie Mae report measuring home purchase sentiment, just 20% of those surveyed back in July believed it was a good time to buy. And many are curbing their house hunting for a bit. That’s OK — there are many reasons why prospective homebuyers might put off looking to purchase a house.
Besides mortgage rates, people may put off a home search to improve their credit rating or buy some time to put down a bigger downpayment. Whatever your reasons are for hitting the brakes, this pause allows you to keep saving money.
This blog has some solid – and some crazy – ideas for how you can build your bank account before buying a house.
1 – Settle on a homebuying budget
Before you even start looking at homes, set a budget. A budget will eventually tell your mortgage lender what amount you’ll want to be pre-approved for, and it’ll inform the realtor of the types of homes (and neighborhoods) you’ll be able to afford.
Having a homebuying budget in mind makes it easier to stay away from homes you can’t afford. Take it from us; this will save a lot of heartaches if you ever see a must-have home at a can’t-make-it-work price. To set a budget, you’ll want to review your overall financial situation and determine:
- Your credit history and credit score.
- Your total amount of debt.
- Your current outlay of cash every month for food, car payments, essentials, etc.
- The amount of monthly income you have coming in.
- The amount you’ve already saved for a downpayment and associated homeownership costs.
Our mortgage partner, Hung Le, will be able to ask you more questions and help you determine a homebuying budget or you can use our affordability calculator. And whatever that number is, look for homes below that range: it takes more money to run a home than just paying a mortgage bill every 30 days. Add some cushion for maintenance and entertainment every once in a while.
2 – Create a monthly savings plan
Once you pinpoint how much you can afford on a home, you’ll want to set a monthly savings goal to help get you there — while still ensuring you can live within a tight day-to-day living budget.
A monthly budget will help you:
- understand where your money is going so that you can put money towards your new house fund
- plan for big expenses
- not overspend on unnecessary expenditures
- find areas where you can cut spending
To create your monthly savings budget, you’ll want to consider your home buying budget (see step 1), think about how long you’re giving yourself to save for a down payment, how much it’ll be) and how much you’ve already put aside.
For instance, let’s say you hope to buy a $400,000 home in 12 months with a 10% down payment. And imagine you have $5,000 already saved. You’ll need to save $2,916 monthly to make up the additional $35,000. If that’s doable within your budget, great. If not, you may need to adjust your timeline, your target home price or both.
And don’t forget, you’ll need to factor in the potential closing costs into your saving plan — these can be 3-6% of a home’s selling price.
3 – Pay yourself first
Want a surefire way to save money? Pay yourself first. A pay-yourself-first plan prioritizes using your income toward savings goals — like buying your home — before living expenses. Whenever you receive your paycheck, immediately put the monthly amount targeted for your house into your savings account.
Putting $$ into your house fund first requires that you don’t spend on anything else until you sock it away to meet your homebuying goals. Putting money towards your new home should be the very first bill you pay each month. To make it easier, work with your bank to set aside the specific amount you determined in Step 2 to be automatically moved to your savings account once a month.
Once this becomes a regular money habit, you’ll have an easier time reassessing your financial priorities. Plus, it’s a great saving skill to use for retirement and other financial goals down the road.
4 – Sacrifice your nice-to-haves
A down payment is a large amount of money, so it’s probably going to be helpful to find ways to cut expenses to help you save — and that means making some sacrifices. Here are some ideas:
- Rethink your weekly grocery spending. With the rise in food costs as of late, maybe it’s time to give name brands the boot. You’ll save tons buying generic.
- Avoid auto-renew. Internet-based apps and streaming services on auto-renew — like Netflix, Hulu, Spotify and Amazon Prime — are easy to forget, especially if you don’t use them much. Grab the scissors and cut away.
- Spend windfalls wisely. If you get a tax refund, work bonus or family inheritance, use it to pay off your student loans or the balance on your credit card. This could affect your debt-to-income ratio and help your lender determine a total monthly mortgage payment you can afford!
- Take control of your cell phone. Get rid of extras like useless warranties, phone insurance and costly data plans. Ask for a better plan or switch providers! Doing so might require a little research, but the savings are worth it.
- Caffeinate at home! Instead of spending $5 (or more) at Starbucks, make your coffee at home. That’s $150 a month!
- Stay put! A vacation does the opposite when trying to save money — unless you try a staycation. Being a tourist in your own town will not only save you $$$, it’ll also help you see your home in a new light!
Let’s get you on the right savings track!
If you’re a prospective first-time homebuyer looking for ways to save, reach out to our mortgage partner, Hung Le, to help figure out how much you can comfortably afford. They will be able to discuss which mortgage would be best for you and help you understand what you may need for a down payment and other closing cost fees.
Or, if you’re ready to get started, apply online today!