Ask Rainy-Day Saver: Saving for a Down Payment

Occasionally, readers ask me for advice. The first thing I mention is that I am not a professional and that they should really consult a financial adviser before doing anything rash. But when a reader asked me a question about saving for a house, I knew I could help.

Dear RDS: My girlfriend and I want to get married and buy a house in the next few years. How much should we save for a down payment on a house, in terms of percentage?  Any advice on how to reduce our expenses so we can save more money?

— Jay

Everyone’s financial situation is different, so it really depends on what you’re comfortable with as a mortgage payment. Where you live is also a consideration — home prices in New York or California are bound to be much higher than in places like South Dakota or Indiana.

Probably the most important question I have is this: Do you have existing debts? If you have credit card balances, I strongly suggest you both pay those off first before even thinking about saving for a down payment. I hate to see folks paying interest rate and fees. That being said, you need to couple your debt repayment strategy with a promise to no longer use your credit at this point in time. Not only will you be more attractive to mortgage lenders, but you’ll have  peace of mind knowing that debt isn’t hanging over your heads. Then, you can focus on saving for a down payment.

I also recommend saving enough money to put down 20% when it’s time to buy your home. A 20% down payment means you don’t have to pay PMI (private mortgage insurance) that many lenders require because of the lack of equity in your new home — and, again, lenders will be happier to give you the mortgage loan you need at a decent interest rate. Also, the more money you put toward the mortgage in the beginning, the lower your payments will be — and that’s a good thing, because property taxes,  utility bills and repairs can get expensive!

If you really, REALLY want to buy a home before you save up a decent down payment, be sure that you can comfortably afford the added expense of the PMI and increased mortgage payment. I’d also factor in whether or not you’ll have the ability to pay extra toward the mortgage principal to increase your equity and reduce your interest payments in the long run.

Reducing Expenses

Here are a few places to look for “extra” money for your debt repayment/down payment!

1. Groceries — Start clipping coupons and sign up for a club card, if you haven’t already. The savings will start to add up!

2. Utility bills — Trim the fat from your cell phone, Internet, cable bills by negotiating lower prices and promotional offers. When the promotional period is up, re-negotiate. Cut out any extra channels you’re not using, and reduce the minutes on your phone plan.

3. Loans — If you have any outstanding student or car loans, work with the lenders to get a lower interest rate. This will save you money in interest payments. Or work out a consolidation plan to pay off the debts faster and at a lower rate.

4. Extras — Cut out that daily cup of Starbucks coffee, brown-bag your lunch, cancel subscriptions (gym, movies, magazines) to anything you don’t have a need for anymore.

Best of luck to you and your girlfriend!