Photo: Quicken Loans
There’s so much to be said about the benefits of owning a home that nothing, not even the economy, can deter its appeal. Even despite a years-long fallout from the subprime mortgage crisis, most Americans still desire a house of their own; it transcends those All-American goals of being successful, raising a family and finding pride in a place you can actually call your own. Plus, it’s a heck of a lot better than renting.
Saving for a house, on the other hand, is where the challenge comes in for many apartment dwellers. Mortgage rates today may be low, but it makes little difference when many renters can’t afford to take advantage of them. The truth is, it’s nearly impossible to save for a house down payment, especially when a big chunk of your income goes towards rent.
The cost of renting can make the idea of owning a home like a passing pipe dream — but saving up for one can be well within your reach. The best ways to save money for a house are simpler than you may think.
How to Save for a House While Renting: A Balance
According to U.S. News and World Report, the average renter spends approximately 35 percent of their gross income on rent and rent-related expenses; and after car payments, groceries and other reoccurring bills have been paid, saving money seems infeasible. The trick is to master the balance of paying your rent and saving some money at the same time. Follow the tips on how to save for a house while renting below: (Photo: Buy and Sell Manhattan)
1. Stick to your savings. Buying a house is like buying a car — the more the down payment, the lower the monthly payment. Real estate blog Apartment Ratings says to create a budget and determine how much you can afford to spend on a monthly mortgage by taking all your bills into account — and the new ones you’ll pay when buying a home, like property taxes. Experts advise saving up 20 percent of a home’s value as its down payment — determining housing costs in the area you’d like to live can help you focus on the amount you’ll need.
Housing blog Apartment Ratings suggests dedicating 10 percent or more of each paycheck to your savings account. Though it may seem small, over time your savings can add up. A weekly savings account contribution of $50 adds up to $2,600 after a year. After five years, and you’ve got $13,000 for a down payment. Double your savings, double your down payment. And don’t forget interest — a higher APY means more money in your account. Does it bring you closer to that 20 percent? Some simple math can give you the answer.
2. Invest. Follow up your savings account with investments like a Roth IRA. According to the blog, this type of IRA allows you to withdraw both contributions and earnings for a house down payment, without penalty fees or tax charges.
4. Roommates. Find a roommate through CraigsList or Roommates.com, according to Wisebread, and the rent for your $1,000 one-bedroom apartment is now split in half. Put the rest towards your housing fund. Wisebread says by sharing costs of groceries and other apartment expenses, or signing up for memberships at stores like Costco, you’ll save even more money.
5. Get creative with couponing. Keep a watchful eye out for sales and make judicious use of coupons, especially when food shopping. ABC News says that in addition, if you shop for groceries once a week, cut out one in every four trips to save 25 percent of your spending.
6. Bundle it up and turn it off. Canceling or downgrading amenities you don’t need, like cable TV, can help you save (and many shows are available free online, too). Does your apartment building have an onsite gym? Wisebread says to cancel that expensive health club membership if you’ve got access to another for free. And use frugal common sense at home — don’t forget to turn off lights when leaving a room, or the water when brushing your teeth. Opt for energy efficient lightbulbs. Reducing your utilities reduces your bills and expands your housing fund.
Other Savings Options
Many individuals qualify for federal assistance mortgage loans from the Federal Housing Administration or Housing and Urban Development, government groups that help lower-income home buyers with raising money for down payments and mortgages. (Photo: BestHomePro)
Another option is what’s called “rent-to-own.” In this case, according to Forbes, instead of buying a new home, a potential buyer rents it and puts their monthly payments, along with an option fee (typically 1 to 3 percent of the home’s value) towards the home’s eventual sale. It’s a helpful alternative because it allows people who can’t afford a down payment to essentially work towards buying their house while living there at the same time. Rent-to-own isn’t without its drawbacks, however.
Like an auto lease, if the renter decides not to purchase the house, their monthly rental payments go towards nothing, and their option fee disappears, too. Tenants undecided about rent-to-own should stick with their apartments and a disciplined savings plan.
Saving for a down payment on a new home isn’t much different from saving for other big expenses — all it takes is some creative financial discipline. Buying, according to the New York Times, is better than renting after five years; use that as a timeline for how long you’ll need to save, and work that into your budget. Soon, you’ll find that getting your foot in the door of your dream home was a dream come true.