How to save for a house

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Buying your own house isn’t just about having a place to call your own. The equity that you build as you pay down your mortgage will be an essential component of your financial security in the future.

When you’re ready to save up for a home, here are seven steps that financial professionals recommend making.

1. Decide how much house you can afford

Only you know how many bedrooms, bathrooms and square feet you need, but that’s not all you’ll need to know. You’ll want to keep on top of mortgage and refinance rates, which frequently fluctuate. Then, you’ll want to determine what you can really pay every month for this significant purchase.

Consider all of your expenses when you do the math. You may earn a certain amount of money per month, but do you also have monthly car payments? Child support payments? Deduct those expenses to figure out the mortgage payment you can afford.

“The general rule of thumb is that your monthly mortgage payment should not exceed 25-28 percent [of] your annual income, divided by 12,” says Jeff Rose, a certified financial planner and founder of Good Financial Cents. “So, for example, if you make $60,000, your monthly mortgage payment should not exceed $1,250.”

Rose recommends including property taxes, mortgage insurance and homeowners insurance into that calculation, too. As for the down payment, its size affects the monthly payments you’ll make during the duration of the loan.

2. Lower your debt

Depending on your situation, it may be more important to pay off debt than save for a down payment on a house. By doing so, you will have more room in your budget to make monthly mortgage payments later on. Plus, paying down some of your debts could improve your credit score, and ultimately, help you get a better rate on your mortgage.

Too often, not having the credit score you need to secure a low rate is one of the biggest mistakes rookie homebuyers make, Rose says.

“The better your credit score, the better the terms you’ll be offered on a mortgage,” he says. “The better the terms, the less you’ll pay in interest over the life of the loan. This can mean a difference of tens of thousands of dollars.”

Improving your score may take patience, but it’s worth pursuing.

 “Bringing up a poor credit score takes time, but financially, most people will come out ahead by renting for a while longer before buying,” he says.

3. Cut expenses

If you find that it’s a struggle to save up for a down payment for a house or to meet that future mortgage payment every month, it’s time to consider cutting expenses.

Ahmed Ali, an outreach consultant at the home management technology company Centriq, suggests reducing expenses by 10 percent to start, if possible.

“This simply means that if your grocery budget comes to $500 a month, try to reduce it by $50,” Ali says. “It is not a huge difference to begin with, but little drops of water make the mighty ocean.”

4. Pause retirement savings

If you’re on the younger side and saving up for a home is proving to be a challenge, you may want to consider pausing contributions to your retirement savings. It’s not ideal, but those funds can be redirected into a variety of other savings methods, including a traditional savings account, a money market account, or a certificate of deposit (CD).

While this tactic can be helpful in saving up for a down payment on a house, it’s not a long-term strategy. It’s something that should only be used for a short period of time.

5. Pay your future house payment

There’s an easy way to tell what you can afford to pay: emulate having a mortgage payment.

“Practice paying this new amount each month, by way of a savings account, and see what you have to go without to make this happen,” says Danielle M. O’Brien, broker and owner at Parkway Real Estate in West Roxbury, Mass.

6. Supplement your income

If you’ve lowered your debts and cut spending, but you’re still falling short of your goal, it may be time to think about earning extra money. If a second job isn’t a practical solution, Shawn Breyer of Atlanta House Buyers suggests getting a roommate.

“Let’s assume your rent is $1,500 per month, and you decide to get a roommate to cut your housing bills in half,” Breyer says. “You are also cutting your utilities in half. Let’s assume utilities are $150 per month, and you are saving $75. Your total monthly savings by getting a roommate are $750 plus $75, or $825.”

Denise Supplee, a co-founder of SparkRental.com, says that she took this route when she was younger and it proved helpful.

“When I was a young single mom, I rented a room out,” Supplee says. “I even got childcare in the deal. I was able to save on the rent and the utilities each month. Make sure, however, if you go this route, that it is permitted by the owners of the home.”

7. Call in a professional

Pat Holland, vice president of Embrace Home Loans, says that first-time homebuyers should have a professional consultation with a mortgage adviser. This expert can help even the least experienced house shopper understand the buying power at their fingertips.

“They can help you understand if saving for a down payment is as important as possibly paying off some debt,” Holland says. “Either one may have a better impact on your availability to purchase a home because of a lower debt-to-income ratio or an increased credit score.”

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