How to Save for a Home in 5 Years or Less

First off, this isn’t another article to tell you that you’re not saving enough. We understand there are a number of reasons that have kept millennials from saving to buy their first home. Instead, we’re here to give you a roadmap for how to save for your first home, if you start saving today.

What You Need to Consider

5% Downpayment + Closing Cost = Total Initial Cost

Down Payments

Your down payment is the lump sum of money you put towards your home purchase. We commonly hear that this needs to be 20 percent of the home’s asking price, but that number is outdated. Today, many first-time homebuyers put down a 5 percent deposit. So, that’s the number we used to calculate what you need to save.

(Keep in mind: A downpayment of less than 20 percent will require you to pay private mortgage insurance. While this won’t be part of your initial payment, be sure you include it in your budget for monthly homeownership expenses.)

Closing Costs

The cash you need when buying a home doesn’t end with your down payment. You also need to account for closing costs, which average around 4.5 percent of the home price. We’ve included these fees into amount so you can be fully prepared, scout style. 

How to Save for a $250,000 Home

250,000 Dollar home breakdown

$250,000 should cover the cost of a starter home in most cities in the U.S. Some cities, like Los Angeles, have a higher average cost for first-time homebuyers, while you’ll be able to get a starter home in other cities, like Dallas or Atlanta, for less. Your estimated closing costs for a home of this price will be $11,250.

A 5 percent deposit on a $250,000 home is $12,500. With closing costs, the total you’ll need is $23,750. Let’s break that down. If you want to save for a home over five years, you need to set aside $91.35 each week. If you want to save the same amount in three years, you’ll need to save $152.24 each week, only about $60 more per week than saving over five years. If you want to save the same amount in a single year, it gets more aggressive. You’ll need to save $456.73 per week. The upside? You don’t have to wait as long. 

How to Save for a $400,000 Home

400,000 dollar home breakdown

Live in a city where starter homes are more expensive? Have your heart set on a remodeled kitchen that bumps up the cost of your home? Let’s look at what it takes to save for a $400,000 home. First, a home at that price point is going to come with estimated closing costs of $18,000. 

A 5 percent down payment for a $400,000 home is $20,000. With closing costs, you’ll need a total of $38,000. So, how do you do it? To save that money over a five year period, you need to put away $146.15/week. To be ready to buy a home in three years, you need a weekly savings of $243.59. To do it in one year, you’ll need to save $730.77 each week.

How to Save for a $600,000 Home

600,000 dollar home breakdown

Say you want to save for a $600,000 home. How much do you need? Your closing costs will be around $27,000. For a 5 percent deposit, you’d need $30,000, bringing the total you need to save to $57,000. What’s it going to take to come up with that cash?

Once again, it depends on how quickly you want to do it. Over a five year period, you have to save $219.23 each week. Over a three year period, you could save that amount by setting aside $365.28 per week. To do it in one, you’d need to save an aggressive $1,096.15 per week.

If These Numbers Freaked You Out, That’s OK

For most people, buying a home is the biggest purchase you’ll ever make. So, if these numbers seemed hefty, that’s OK. Take a deep breath. You can do this.

The key to wrapping your head around big numbers is to break it down. Are you saving for a home with another person? If so, you get to cut all of these numbers in half. If you each switch from buying your lunch to packing one, that’ll save each of you around $25 per week. If you’re an active rideshare user, cutting the habit could free up another $25/week. A lot of the time, we don’t realize how much money we’re spending on alcohol. Your weekly drinks routine could be costing you up to $150 each week. We’re not saying you have to go dry to buy a home, but reinvestigating some of your financial routines can free up a bunch of money.

Making an alternative plan for some of your routine spendings can make saving for a house so much more manageable. Even with a weekly alcohol stipend of $100, cutting those other costs could save you between $100-$200/week (depending on how many Lyfts/Ubers you want to give up). See how easy that was? 

Set a Timeframe

You might have noticed that the one-year timeline was the most aggressive. If you’re determined to save in a year, and you’re willing to cut out restaurants and other people’s weddings (they cost so much money), it’s achievable.

If setting a weekly savings goal between $456 and $1,096 is going to make you feel disheartened, then don’t do it. This isn’t about buying a home the “right way.” This is about setting yourself up for success by making a plan that you can stick to.

Saving over a three year period of time is a lot more manageable than saving over one year. Making a three-year plan will give you time to boost your credit score and research the market. You can keep an eye on market trends by watching the real estate data in your desired neighborhood(s).

If you’re only vaguely thinking about buying a house one day, try following the five-year savings plan. When the time comes to buy a house, you’ll be relieved. 

Set Up Direct Deposit

The best way to stick to a savings plan is to have the deposits made automatically. You can set up recurring deposits or transfers to be made into a savings account on a weekly or monthly basis.

Other Ways to Save

In addition to weekly deposits, there are other ways to bulk up your down payment savings. You can ask for holiday and birthday gifts to go towards your down payment. If you’re graduating, getting married, or celebrating another life landmark that usually comes with sizeable cash gifts, so you can put those towards your savings too.

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