With interest rates going up, I anticipate a lot of calls in the next few weeks and months from clients anxious about whether they should try to buy a house now before mortgage rates start to rise.
(First, the answer is probably no: Interest rates aren’t rising that fast, so there’s no reason to worry about getting in on a great mortgage rate right this minute if you’re not really ready.)
In last week’s Money Moment, Marie revealed that she and her partner decided to use the savings they’d accrued as a cushion for their business to make a down payment on a house — and a whole new lifestyle. But what if you don’t have the luxury of existing savings to move around in order to make your move?
Saving for a home in 5 steps
- Get clear on your goals.
Unless you’re new around here, you’ve probably heard me say this before, but I’ll say it again: How much house are we talking here — a $100k condo or starter home or a $500k dream home? How much do you actually need for a down payment? Check out the calculators from sites like fha.gov to find out how much house/mortgage you can realistically afford, and how much down payment you want to have.
- Open a savings account.
This may seem like a no-brainer, but it’s good to have a separate place to stash your cash so you aren’t tempted to dip into it for regular expenses or splurges. In fact, if you can open a savings account with a higher interest rate — even with a different bank than your normal bank — that can be good too, because it can take longer to transfer funds, giving you time to think about your decisions.
- Create a conscious spending plan.
Notice I did NOT use the B-word (budget), but we want to look at where you can comfortably cut back in order to start saving a bit more aggressively. Maybe you can live without an unlimited data cell phone plan, cable TV, or your daily Starbucks — your mileage will vary, but cutting back on some things you can comfortably live without will add up quickly in your new savings account.
- Commit to putting windfalls into savings.
Get a tax return this year? Put it toward the house. Get a raise at work? Put the extra toward the house. Birthday check from Nana? You get the picture. This is free money! And while it can be tempting to spend it, if you can get in the habit of socking it away, you’ll be that much closer to your goal.
- Check and take steps to improve your credit.
Getting a mortgage will depend a lot on your credit, and lenders are often willing to take a smaller down payment if you have great credit. So check your credit and then take any steps you can to improve it. Sometimes there are errors that can cause a big ding in your score. Be sure to check your score and start addressing any errors at least a few months before you want to apply for a mortgage, to give them a chance to be cleared.
Of course, everyone’s situation is different, and there may be other ways that you personally can raise more or save more for a house, but the only way to know for sure is to get some personalized advice.