Saving For that First Mortgage

Purchasing a home, particularly the first one, is an enormous undertaking that requires a great deal of advance financial planning. This is not always obvious to those who have yet to enter the housing market. Such potential purchasers may only think of a mortgage in respect of the monthly payments they must be able to meet. However, being able to qualify for that first mortgage will also require a hefty down payment.

mortgageIn the years prior to the present worldwide economic crisis, down payment requirements tended to be considerably smaller than now and the interest rates on the loans were higher. The reverse is now true.  In addition, the steep decline in house prices since 2007 has made many banks much more cautious about lending. Because the lending institutions are concerned that the housing market has not yet stabilized, they have increased the level of their deposit requirements. By asking borrowers to initially contribute more money, banks have increased confidence that homeowners will not simply abandon their mortgage if the economic situation worsens, because they will own some equity in their home.

These higher down payment requirements – typically 20% of the purchase price of the house – mean that most prospective buyers must save tens of thousands of dollars in order to qualify for a mortgage. Accomplishing this will require a real effort, but it can be done.

How to Save Money

A first step to saving money toward a deposit is to find ways to cut your expenses. Most financial planners recommend that you track your spending carefully for at least a month. This will allow you to understand how your income is currently being distributed across various expense categories, such as rent, food, clothing, entertainment, and job-related expenses.

Accumulating enough cash for a down payment can be a challenge that may require some sacrifices. Most entertainment expenditure that was previously regarded as normal will have to be cut dramatically. One of the simplest steps to take is to eat out less often – a similar meal can often be prepared at home for a fraction of the cost. It will also be necessary to eliminate the use of unnecessary goods and services. Few people truly need both a landline and a cell phone. Similarly, many people with an unlimited cell phone plan only use 200 minutes per month. Examine your spending to see what kinds of items can be cut out.

The single biggest monthly expense for most Americans is rent, which means in turn that housing expenses are a potential source of significant savings for those willing to adjust their way of living. A person paying $1000 per month for a major city apartment can free up $500 per month for savings merely by taking in a roommate – a strategy that will also result in shared utility bills. Young adults are also living with their parents for longer periods of time before they set out on their own, so that they can save toward a down payment.

Those that are unwilling to share their living space or to return to the family home can probably still trim their rent expenses by moving to a less expensive apartment. Be careful, however, to evaluate how a longer commuting distance to work may impact your overall budget. There is no sense, after all, in saving $50 off your rent only to pay $75 more in transportation expenses.

Other ways to save money toward a deposit may not produce huge sums each month, but every little bit will help. Economize as much as possible by shopping in second-hand stores more often, or by comparison shopping online.

Types of Savings Accounts

You should also compare the savings products at banks and other financial institutions to determine the best place to open your account. Ideally, a savings account should be more than merely a place to deposit money toward your goal. To ensure that you can reach your target sum as soon as possible it should also be an efficient investment vehicle that will help your money to grow.

Most banks offer consumers two kinds of savings accounts. The first, known variously as a basic, passbook or traditional account, usually has a very low minimum balance requirement and allows you to withdraw your funds as needed. These accounts generally carry modest interest rates.

The second kind of account is a money market account. These generally require a significant minimum balance and may also limit your withdrawals to some degree. In return, they pay interest at money market rates. These higher interest rates will obviously help your money grow more quickly.

Many savers begin with a traditional savings account but fail to realize that as their balance grows, more options become available. As soon as you can meet the minimum balance requirements for a money market account, you should consider whether moving your funds will help you to more quickly achieve your ultimate goal: home ownership.

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