How to Save for a Down Payment for a House

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So you’ve decided you’re ready to buy a home—now it’s time to set aside money for it.

Most Americans only save about $6.60 for every $100 earned—down from a record high of $17 in May 1975, according to the U.S. Bureau of Economic Analysis.

But saving for a down payment for a house doesn’t have to be an ordeal. Here are seven steps to help you on your way to homeownership:

1. Know how much house you can afford

This is a smart first step that will help you compute how much your down payment for a house should be. You may already have a sense of what you can afford, but talking to a mortgage lender will help you pinpoint an amount. Or, you can calculate it yourself using the same debt-to-income ratio banks use to determine how much they’ll loan you.

Here’s how: Divide your monthly gross income (what you earn before taxes and other deductions) by your monthly debts—including an estimated mortgage payment. One of AAA Banking’s online calculators will help you determine monthly payments on houses at various prices.

Generally, no more than 43 percent of your income should go toward your mortgage and other debts, such as an auto loan and monthly credit card payments.

2. Determine a goal for a down payment for a house

A down payment for a house is ideally 20 percent of your home’s value. Anything less and you’ll likely be required to have private mortgage insurance (PMI)—an additional cost of about 1 percent of the loan amount per year. For a $230,000 home, 20 percent down would be $46,000. If that seems like an unrealistic goal, there are loan options that allow you to have a smaller down payment for a house. Some loans require as little as 3 percent down (or even nothing for some government loan programs), but having 5 percent or 10 percent down could help you get better mortgage terms.

Required to have PMI? There’s good news: You may only need it for a few years depending on how your home equity increases. Set a calendar reminder for two or three years down the road to talk to your agent about whether you qualify to cancel this additional cost.

Talk with a mortgage lender to determine what’s right for you and what you qualify for. Once you’ve decided on your goal, it’s time to start saving.

3. Rethink your monthly budget

If you haven’t already, track all your monthly expenses—and then determine what you can trim or eliminate.

Here are a few ideas to start: Cook a healthy dinner at home rather than eating out, replace your annual beach vacation with a staycation and save on local attractions or hold onto your car for a few more years (or opt for a used car instead of a new one). There are plenty of small ways to save that can add up to a bigger down payment for a house.

4. Make savings automatic

You can’t spend it if you don’t have it. Use your workplace’s automatic payroll deduction or have your bank transfer a set amount into a dedicated savings account each month earmarked for a down payment for a house, and watch those savings add up.

5. Check interest rates

Not all savings accounts are created equal, so it pays to shop around. Some earn more interest than others—which can help you grow your savings faster. You may also want to consider higher-yield options like CDs or money market accounts. AAA Banking can help you sort through the choices.

6. Save less for retirement

Assuming retirement isn’t just around the corner, you could redirect your retirement contributions toward your down payment for a house for a set period. Getting to a point where you’re building equity in a home sooner is another way to build your net worth.

7. Downsize to upsize

If you need to, could you move to a smaller apartment to save money each month? Sacrificing on space now could mean more money in your savings—and put you another step closer to a home of your own.