How to Save for a Down Payment on a House

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Even if you know how much house you can afford, you still have to figure out the best way to save for it.

Some homebuyers forget this step. That’s why the average down payment on a new mortgage in 2016 was just 11 percent of the purchase price, according to a National Association of Realtors survey.

Here’s how to ensure you can make a larger down payment, and clear the 20 percent threshold to avoid private mortgage insurance (PMI).

How to save for a down payment

Just because some lenders let you sign a mortgage agreement with 5 to 10 percent down doesn’t mean you should. The higher a down payment you can make, the less interest you’ll pay over time. Our home mortgage calculator makes this pretty clear.

But figuring out how to save for a down payment on a house is the tricky part.

Most aspiring homebuyers take their spare change at the end of each month and put that toward their big savings goal. But if the goal of buying a home is an important one, prioritize it by including it in your current budget.

Your down payment should be a line item. It might sit right alongside essentials like rent, groceries, and debt payments.

To figure out your savings target, start with four weeks of after-tax income, said G. Brian Davis, director of education at Spark Rental.

“Not their annual income divided by 12, but four weeks’ pay, since that’s what they actually have to work with in most months,” Davis said. “Of that after-tax pay, they should set a target savings rate, preferably between 10 and 20 percent.”

That money should be moved, one automatic transfer at a time, from your checking account to an account set up purely for your down payment on a house.

4 ways to save for a down payment on a house

Poll a group of financial planners and real estate agents, and you might start hearing the same advice over and over again. That’s because there are some widely held truths about saving for a down payment. Here are the most common:

  • Prioritize a lower-risk account that ensures slow, steady growth. It’d be wise to avoid accounts that put your savings at risk in the short term.
  • Set up a new account for the sole purpose of saving for a home. It’ll be easier to budget and track your progress this way.
  • Automate contributions to your account. This can keep you in the habit of saving and help you go without those extra dollars each month.

You can also research the varying interest rates on different savings account types to determine the best spot to keep your down payment. If you plan to pull money out of your 401(k) for your down payment, you’ll want to research the potential drawbacks.

But the general do’s and don’ts might not be what works best for you. For example, the best savings vehicle for you might not be best for someone else.

If you’re hoping to purchase a home within five years, here are four account types recommended by financial planners.

1. Traditional or Roth IRAs

A traditional IRA might be the top option for first-time homebuyers. The IRS allows each member of a married couple to take out as much as $10,000 for a home without having to pay the 10 percent penalty for an early withdrawal. They would just have to pay the taxes on their combined, maximum withdrawal of $20,000.

The same goes for a Roth IRA, although the tax hit would be smaller, as contributions are made with after-tax income.

“Since a [Federal Housing Administration] loan only requires you put down 3.5 percent of the value of the home for down payment, the $20,000 should more than cover it,” said Ben Barzideh, a wealth advisor at Piershale Financial Group. “I’ve had younger clients who have done that.”

2. Municipal bonds

“How far out the goal is for a down payment on a home will determine how aggressive or conservative you should be with the funds,” said Tyler Huck, vice president of oXYGen Financial.

If your goal is to buy a home within five years, Huck said you should take the conservative approach by investing in your state’s municipal bond funds. All interest and dividends paid off in these types of investments are tax-free, he added.

3. Money markets and CDs

Shop around for the best possible interest rate on a money market account or a certificate of deposit (CD). Compared to a traditional savings account, these types of accounts typically offer better rates.

However, a CD will limit access to your savings for a fixed period. Money market accounts, meanwhile, might come with higher minimum balance requirements.

You might be tempted to grow your money faster elsewhere. “But one down year during the saving period could undo months of saving,” said Ilene Davis, a certified financial planner.

4. Savings account

A basic savings account is the safest way to store your future down payment. It also keeps your money accessible in the event your dream home comes onto the market in your price range.

You might consider opening your new account at an online bank, which usually beats the rates of national brick-and-mortar banks. These days, you might be able to score a 1 percent return on your money.

“You don’t want to put the money that you are saving for short-term goals in riskier assets such as stocks in bonds,” said Drew Feutz, a certified financial planner at Market Street Wealth Management Advisors. “These assets should be used for more intermediate and long-term goals.”

How saving for a down payment is unique

Aside from how long it takes to save for a home, saving for one is unlike the other big goals you might track in the money-management app Mint. That’s because the down payment is only a starting point.

If you’re unable to make a down payment that is at least 20 percent of the sale price, for example, you’ll also have to budget for PMI.

Tack that onto your monthly mortgage payments and other home-related fees:

  • Escrow costs
  • Home insurance
  • Maintenance costs
  • Property taxes
  • Homeowners association or co-op fees

Each of these costs could be planned for in your savings target. The more time you can give yourself to plan, the better off you’ll be.

You shouldn’t feel any rush to save your down payment, either. Nearly two-thirds of respondents to a 2017 Apartment List survey, for example, will need more than five years to save a 10 percent down payment.

Make sure to include other expenses of buying a home when you budget for your down payment. You might decide to decrease your down payment to keep more cash on hand for an emergency home repair.

Knowing how to save for a down payment — and what kind of account to do it in — are just the first steps of the home-buying process. Familiarizing yourself with the rest might seem like a tall order, which is why you’ll almost always want to hire a real estate professional.

If you’re not that far along yet, it might be worth reviewing the boxes you should check before buying a home.

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1 Important Disclosures for Laurel Road.

Laurel Road Disclosures

  1. VARIABLE APR – APR is subject to increase after consummation. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes.

2 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student Loan RefinanceFixed rates from 3.999% APR to 7.804% APR (with AutoPay). Variable rates from 2.480% APR to 7.524% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.480% APR assumes current 1 month LIBOR rate of 2.07% plus 0.91% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score
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3 Important Disclosures for CommonBond.

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  1. Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). The following table displays the estimated monthly payment, total interest, and Annual Percentage Rates (APR) for a $10,000 loan. The Annual Percentage Rate (APR) shown for each in-school loan product reflects the accruing interest, the effect of one-time capitalization of interest at the end of a deferment period, a 2% origination fee, and the applicable Repayment Plan. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment, which is reflected in the interest rates and APRs displayed. Variable rates may increase after consummation. All variable rates are based on a 1-month LIBOR assumption of 2.08% effective July 25, 2018.

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  1. Education Refinance Loan Rate DisclosureVariable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2018, the one-month LIBOR rate is 2.07%. Variable interest rates range from 2.72%-8.17% (2.72%-8.17% APR) and will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a cosigner. Fixed interest rates range from 3.50%-8.69% (3.50% – 8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensbank.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled, must be in repayment of their existing student loan(s) and must make the minimum number of payments after leaving school. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a co-signer who is a U.S. citizen or permanent resident. The co-signer (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a co-signer will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.
  7. Average savings based on 18,113 actual customers who refinanced their federal and private student loans through our Education Refinance Loan between January 1, 2017 and December 31, 2017. The calculation is derived by averaging the monthly savings of Education Refinance Loan customers whose payments decreased after refinancing, which is calculated by taking the monthly student loan payments prior to refinancing minus the monthly student loan payments after refinancing. The borrower’s savings might vary based on the interest rates, balances and remaining repayment term of the loans they are seeking to refinance. The borrower’s overall repayment amount may be higher than the loans they are refinancing even if their monthly payments are lower.
2.57% – 5.87%Undergrad
& Graduate
Visit Earnest
2.80% – 6.38%1Undergrad
& Graduate
Visit Laurel Road
2.48% – 7.52%2Undergrad
& Graduate
Visit SoFi
2.47% – 7.99%Undergrad
& Graduate
Visit Lendkey
2.57% – 6.65%3Undergrad
& Graduate
Visit CommonBond
2.72% – 8.17%4Undergrad
& Graduate
Visit Citizens
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