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Save smart for your down payment

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Key takeaways:

  • A down payment is an important part of figuring out how much home you can afford.
  • The larger your down payment is, the less you’ll have to pay on other items such as PMI (Private Mortgage Insurance).
  • Budgeting, cutting unnecessary expenses and lowering your monthly bills are just a few ways to save for your down payment.

Transitioning from renting to buying is a big step for many prospective homebuyers. While some mortgage payments may end up costing less than monthly rent, one major step in buying a home is the down payment.

This can be a daunting prospect considering it involves saving a large sum of money. This is especially true considering the price of a typical existing home sold in 2017 was more than four times the median income, according to the Joint Center for Housing Studies of Harvard University.

How much do you need for your down payment?

When thinking through how much home you can afford, a good place to start is with the down payment.

The down payment is the lump sum you pay upfront for your home, and the size of your down payment affects your PMI. Typically, if your down payment is less than 20 percent of the home’s value, you’ll have to pay PMI. This is required to protect your lender if the home ends up in foreclosure – the thinking is those with less equity in their homes could have an easier time walking away.

As a first-time homebuyer, the PMI is another expense on top of many others including insurance, closing costs and maintenance. It’s important to consider these costs, which you can learn more about in the MidWestOne first-time homebuyer’s guide, before determining how much home you can afford and what your down payment will be. 

The right mortgage partner can help you navigate around the 20 percent down hurdle. They can even find programs that help make the down payment seem less daunting, and they can help you determine the right down payment for your finances.

Remember to consider that a smaller down payment can also result in higher rates in addition to the PMI. Furthermore, if your credit score is low, you may not qualify for a mortgage at all, so it’s important to start saving and improving your credit score when approaching the homebuying process.

Steps to save for your down payment

Once you’ve determined what type of down payment you want, it’s time to save. Here are some tips to help you start saving:

  1. Develop a budget: Creating a budget allows you to realistically think through how much you can save each month. It also helps you see where money is going and better evaluate expenses to cut. If you need help starting a budget, read this.
  2. Establish a dedicated savings account: Set up a savings account that is exclusively for your down payment and automate monthly contributions to it. Keeping the fund separate will help you avoid tapping into it.
  3. Reduce monthly expenses: Shop around for the best rates for your car insurance, renter’s insurance, cable/internet and cell phone plan. These companies often run deals that could allow you to save large sums simply by adjusting your contract.
  4. Monitor your spending: Utilize online banking to keep an eye on your spending. Set a limit for yourself on what you’ll spend for items that aren’t needed such as eating out, clothing and more.
  5. Take advantage of first-time homebuyer programs: Pending your income and location, you could be eligible for an incentive or discount when purchasing your first home. Many states, counties and local governments offer programs to help encourage first-time homebuyers to purchase homes in their community. MidWestOne bankers help mortgage customers find the right programs for their homebuying needs.
  6. Set rewards: Considering that saving for such a large sum can sometimes be discouraging, set benchmarks to reward yourself for your saving. For example, if you’re trying to save $25,000 total, consider buying a home decoration for every $5,000 you save.

If you’re interested in finding more about purchasing a home and saving for a down payment, visit your local MidWestOne branch for our Home Lending Days event.

Save smart for your down payment

MidWestOne Bank does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.