Takeaways
- Higher down payments make your house more affordable and reduce the amount of interest you will pay.
- Strategic cost-cutting can increase your monthly savings for your down payment fund.
- Earning more income with a side hustle will boost your savings rate.
- Gamify your saving strategy to increase saving longevity and make the process fun.
- Create a down payment saving fund with a fun name to increase the likelihood of reaching your savings goal.
Some of the links in this article are from advertising partners of Smart Money, which does not influence our evaluations or recommendations. We work to provide you with accurate and reliable information. Our opinions are our own.
Saving for a down payment can seem impossible when you are renting. With inflation and the ever-increasing cost of rent, you can feel stuck in a cycle of high rent payments and low savings. The average rent for an apartment in the U.S. is $1,702[1]. With so much of your monthly income going towards renting an apartment, how are you supposed to also save for a down payment for your first house?
The good news is that saving for a down payment is possible. Millions of first-time homeowners do it every year. You can do it too, and we will show you how.
What is a Down Payment?
A down payment is a sum of money a homebuyer pays to a lender upfront when purchasing a new house. The amount of the down payment varies from house to house and person to person, depending on the transaction and incentives offered by your lender. A down payment is expressed as a percentage of the overall purchase price.
How to Save for A Down Payment
Personal finance professionals recommend paying at least a 20% down payment on a house. The higher your down payment, the lower the mortgage you will need to finance your home. A higher down payment reduces the total interest you will pay over the life of the loan (saving you money in the long term) and decreases your monthly payments, which increases the affordability of your new home.
Learn More -> 30-Year Fixed-Rate Mortgage: Pros and Cons
Down payments vary by circumstances too. Some homes require little to no down payment. While down payments are certainly part of the home-buying equation, the affordability of your mortgage is another critical factor when buying a home. You might be able to afford the down payment, but you also want to ensure you have enough liquid cash on hand to handle other costs of homeownership.
Learn More -> 15-Year Fixed-Rate Mortgage: Pros and Cons
13 Ways to Save for a Down Payment While Renting
Paying for your rent might be inevitable for now. Let’s dig into ways to save for a down payment even while still paying rent.
1. Set Your Financial Goals
Creating financial goals will help guide you through periods of indecision. Don’t know how to set financial goals? The process is simple. All you need to do is sit down with a pen and a piece of paper and think about what you want out of life.
As the saying goes, you can’t manage something you don’t measure. This includes your financial goals too. By creating a list of money goals, you give yourself a visual path into the future with step-by-step instructions on how to reach those goals.
Start by developing a list of annual goals. Think about what you want to accomplish in one year, three years, and five years. After you have your list, you can reverse engineer how to achieve those goals by crafting a budget.
2. Follow Your Budget
Budgeting is magic because it lets you command where and when your money is going throughout the month. Most people go through the month not knowing where they spent their money, only to wind up at the end with little to no savings. Budgeting puts control back in your hands, giving you the power to dictate what happens with your money, like saving for a down payment.
Creating a budget can be distilled into several simple steps:
- List your monthly income(s).
- Write down your monthly expenses.
- Subtract your expenses from your total income.
- Catalog expenses throughout the month.
- Create a new budget for every month.
Knowing how a budget works is only part of the equation. Next, select a budgeting strategy that aligns with your personality and short-term financial goals. The right budgeting strategy will help you reach those goals faster. And there are many different budgeting strategies to consider. Here is a list of some of our favorites:
Calibrating your budget to get it just right might take a couple of months. With a couple of cycles underneath your belt, you will become a budgeting pro in no time. This will help you increase your savings and meet your goal of saving for your down payment as quickly as possible.
3. Pay off Your Debts
As a first-time home buyer, you don’t want to purchase a home when you are already in debt. High credit card debt or other consumer debt can count as a strike against you during home-buying. If you have a high debt-to-income lenders will be less willing to give you the best mortgage rates because you will be perceived as a riskier borrower.
Smart Money-> What is a Credit Score?
Planning to get rid of your credit card debt, auto loans, and other consumer debt before you purchase your home is a smart money move. While paying off these debts might take some extra time, you will be able to afford a larger home after this debt is paid off. Buying a home is a wonderful experience, but ensuring you are prepared for the transaction is even better.
Smart Tip:
Check out our Ultimate Guide: First Time Homebuyer’s Guide. While the down payment for a house can be expensive, as a homeowner there will be other hidden costs everywhere behind many corners. Make sure you are prepared for these costs too.
4. Set a Saving Target
How much are you going to save for your down payment? The answer to this question is largely determined by how much house you can afford and what financial rule of thumb you use for your down payment. Are you going to put 3% down or 20% down?
One of the best ways to figure out how much you will need to put down is to shop around for houses in neighborhoods where you might want to live. Determine the average home value in that neighborhood and calculate what you would need to save to buy an average home in that zip code.
Get Smart -> What is a Slush Fund?
For example, the average listing price could be $500,000, requiring you to save $100,000 to put down 20%. Saving that amount of money will take some planning and diligent saving. But if you implement the right saving strategies and set a high enough savings rate, you could be there before you know it.
Smart Tip:
A high-yield savings account can be a great place to store your down payment and earn interest income. Let your money work hard for you while you are working hard for your money. Saving can help you reach your goals quickly.
5. Find a Roommate
Renting an apartment can be extremely expensive in major cities. The average 4-bedroom apartment in New York City is $7,250 per month[2]. While these cities command high salaries, it can feel impossible to reach your savings goals against the headwinds of insanely high rent. One of the solutions, whether you are in New York City or Austin, is to find roommates to help split the cost of renting.
You can cut your renting costs by half simply by finding a roommate. Check out websites like Roommates.com or Diggz to find a roommate in an unfamiliar city.
6. Find a Cheap Apartment
Moving apartments can lighten the load on your budget. If you are planning on saving for a house, now might be a good time to start looking for a cheap apartment so that you can put more money toward your savings. Even $100 or $200 per month can add up over time and end up paying for a down payment or closing costs.
Take advantage of geographic arbitrage if you are working from home. Do you need to work remotely in New York City when you could move to Austin, TX, and reduce your rent immediately? Think about how quickly you could fill up your savings fund by taking advantage of the cost-of-living differences (not to mention the income tax savings).
7. Start a Side Gig
Here’s the deal; you can exhaust ways to cut costs or focus on making more money. Increase your income with a side gig by picking up a freelancing job. You can use websites like Upwork to pick up jobs periodically after your day job. Side hustles can add some serious cash to your down payment savings fund.
Smart Money-> Need More Money? Try These 29 Side Hustle Ideas
When you increase your income, make sure that extra cash heads straight into a high-yield savings account, and avoid the temptation to spend this extra money and keep your eye on the prize.
8. Cut Frivolous Spending
Have you analyzed your spending in the last several months? Now that you are fully committed to saving for a down payment, it’s a great time to examine your purchasing behavior and home in on only buying items you truly need. It is time to cut frivolous spending from your monthly diet.
Grab a highlighter and look at the last 2-3 months of credit card and bank statements. Find how many purchases you didn’t need to make. The total number and costs of frivolous spending might surprise you. But now you know when and where to cut unnecessary costs. Every time you want to purchase similar items in the future, transfer what it would have cost into your online savings account. This will create a healthy smart money habit.
9. Save Extra Money
With your goal of saving for a down payment at the top of your mind, it’s time to start finding extra money wherever you can. You might be able to get the raise you deserve at work, which could help you reach your savings goal. The point here is that the extra money you make needs to go directly into savings. Don’t spend it frivolously, which can be particularly challenging with bonuses.
Learn More -> 6 Hidden Costs of Homeownership That Might Suprise You
Do you get bonuses at work? Whether they are expected quarterly or annually, or completely unexpected, it’s vital to resist the urge to spend your windfall. Focus on being able to purchase your first home.
10. Start a Dedicated Savings Account
What’s in a name? Well, for savings accounts it turns out that naming your account can dramatically boost your savings rate. Research has found that if you name your savings account, think “Down Payment for Dream Home,” you are much more likely to save for that goal and increase your savings.
Get Smart -> Best High-Yield Savings Accounts
If you are saving more money, it makes sense to put your money in a high-yield savings account to pump your earnings up even more. Put your idle cash to work and earn interest income during the process. Earning interest will expedite your collision with success.
Member FDIC
Axos Bank® Rewards Checking
Smart Money Rating: 5/5
APY: 3.30% with No Minimum Balance
Bonus Offer: Up to $300 Bonus (Terms Apply)
11. Negotiate with Your Landlord
There are many ways you can reduce your rental payments. Negotiate with your landlord upfront and get the lowest rental cost possible. You can do this by making a personal appeal or offering longer lease terms for reduced monthly rent. For example, a two-year lease with a 10% decrease in overall rent could be huge for your ability to save for your down payment.
Not all landlords will agree with this approach, especially in super competitive metropolitan cities like New York or San Francisco. But it’s always worth a shot.
12. Sell Your Extra Stuff
Think about all the clothes, shoes, and just general stuff you have lying around your apartment that you don’t use anymore. Here are some ideas of items you might want to sell:
- Furniture
- Books
- Video Games
- Toys
- Computers
- Jewelry/Watches
Convert these unused items into cash. Not sure where to start? Check out online selling platforms like Facebook Marketplace, eBay, or Craigslist. You might be surprised by the breadth and depth of these marketplaces. For those who want to adopt the minimalist mindset, you can use Marie Kondo’s strategy from her book The Life-Changing Magic of Tidying Up to shed your apartment or rental house of items you don’t need. Be creative and turn your unused items into cash for your down payment.
13. Consider Not Renting at All
What are you willing to do to reach your down payment goals? You can take advantage of geographic arbitrage and save more money. Or you can take a hiatus from renting altogether. While not everyone has this option available, try moving in – rent-free – with your parents, aunts, uncles, or another family member.
Maybe a friend or family member has an extra room they would lend to you. By not having to pay rent – one of the highest fixed costs on your budget – you could use this opportunity to press on the saving accelerator.
Smart Summary
Buying a home can be one of the most memorable experiences in your life. Ensuring you are fully prepared for the transaction is essential to feel good about your house. As with any other purchase, the more prepared you feel, the better you enjoy the purchase overall. That means getting your finances in shape and leveraging as many ways as possible to save for a down payment. Deciding to purchase a house can be one of the smartest money moves. Enjoy the process and focus on finding the best home.
Frequently Asked Questions
There are a variety of budgeting strategies that can help you start saving for your dream home. Each strategy has its pros and cons, and you can decide how much flexibility you need to stick to your goals. The Pay Yourself First Budget is an excellent budgeting strategy for focusing on saving for your down payment because it forces you to save first and spend later.
You should keep your down payment funds in a high-yield savings account. Stashing your down payment in a high-yield savings account can put hundreds, if not thousands of dollars of interest income into your pocket. This might trigger your interest in saving and investing more.
The short answer is: Now. Of course, the first step toward saving for a down payment might not be saving for the down payment. You might need to get your finances in order first. This means paying off consumer debt and increasing your credit score.
As a first-time homebuyer, there are a lot of factors to consider before buying a home. You want to ensure you are fully educated on all the costs of the transaction, and hidden fees that catch potential homeowners off guard and put yourself in the best financial position to get the best mortgage possible (after all you might be paying this off for 30 years). Check out our Ultimate Guide: First Time Homebuyer’s Guide to get started on the homebuying process.
