How To Save for a Down Payment

Congratulations! You’ve just decided you’re ready to buy a house! This is a big deal — AND a big purchase. 

After determining you’re financially ready, one of the first steps to buying a home is to plan for the down payment, which is the money you need to have upfront to purchase the home. It will be a percentage of the full price. 

It’s a large chunk of cash and requires you to start saving long in advance to be ready to fork it out once the perfect home comes along. 

First, Some Dos and Don’ts

Before you start saving up for that dream home, make sure you know what to do and what not to do.

DO: Figure out how much you need to save

You can get a pretty good estimate by doing a quick Zillow search. Start with a search for recently sold homes in your area to find the selling prices. 

A down payment has traditionally been 20%, but the national average is lower — around 15%. However, the average for first-time homebuyers is even lower, at 6%. 

Generally, a first-time homebuyer can safely expect a down payment between 6% and 12%.

But there is a benefit to paying closer to that 20% mark. You’ll have no private mortgage insurance (this kicks in when buyers pay less than 20% down on their home), which saves some extra dollars in the long run. 

However, it may be both reassuring and helpful for your planning purposes to know that you likely will not need to save up a full 20%. Just don’t forget to save money for closing costs and inspections, too.

DO: Have a plan of action

Once you know the ballpark range of how much money you’ll need to save for a down payment, you should have a solid plan for how you’re gonna get there.

Saving a large amount of money doesn’t happen overnight! 

Setting a realistic budget will help you prioritize your down payment goal while you balance other financial obligations in your life.

DON’T: Ignore your other goals 

Once you determine that you want to buy a house, you may realize that you’re saving for a lot of things at the same time. 

While it might be overwhelming, it’s important not to disregard your other goals while you save for your down payment. 

Don’t ignore your emergency fund and retirement funds! You never know when you’ll need that extra cash to pay the bills, and retirement will always be on the horizon. 

DON’T: Just dream it

It’s really difficult to reach a goal when you just tell yourself, “Well, one day I’ll get there!” 

You have to set a concrete goal with a completion date at which you’ll have saved enough to afford your down payment. 

READ MORE: Short-Term vs. Long-Term Financial Goals

How To Start Saving Money for Your Down Payment

Once you know how much money you need to save for your down payment and you have a budget to reach your goal, it’s time to actually save those dollars. 

There are two ways, and it’ll probably take a bit of both to help you reach your goal: 

• Cut expenses 
• Find ways to make more money

Make more money 

One of the first things you can do to make more money is to ask for a raise.

This sounds scary, but don’t expect your hard work to be recognized automatically. Be proactive — you can miss out on a lot of money by simply not asking for it!

Something I did to assist me when asking for a raise was to keep track of my significant accomplishments at work. When I approached my boss for a raise, I could back up my request with evidence of my valuable work. 

Having leverage ready to prove my excellence made that conversation a lot less intimidating. 

A second way to make more money is to start a side hustle. Any extra income you bring in will get you closer to affording your down payment. 

A side hustle can look a lot of different ways. You can open an Etsy shop, walk dogs, or start a YouTube channel like me! 

Tip: If you’re getting married, set up a house fund instead of a traditional registry. That way, guests will be getting you closer to buying your dream house instead of getting you plates and silverware.

Save more money 

On the other side of the equation, you can work on increasing how much money you save each month. 

First, work on paying off your existing debt. This is especially important if you have credit card debt. Interest rates are high, and you’ll save more money in the long run when you put extra dollars toward the principal to avoid the heavy cost of interest.

Another way to start saving money is to make small changes in your spending habits. You might look at how much you’re spending on stuff like streaming services, going out for coffee, and Amazon. 

See if you can cut out a streaming service next month, or even cut down to only one for TV and one for music. Saving on the smaller things really can help your savings grow!

If you want to see bigger savings faster, evaluate your larger expenses — how can you cut them down? 

Things like rent and transportation make up huge chunks of our budgets. If possible, consider moving from a larger, more expensive apartment to a smaller one that costs less. If it’s an option for you, talk with your parents and see if you can move in with them to save even more money. 

Start taking public transportation to work to save on gas and other car expenses. 

These types of lifestyle cuts aren’t possible for everyone, so evaluate your own living situation to determine if they could work for you.

READ MORE: How Much Should You Save a Month?

Separate your money

Here’s a trick I use when I’m saving for a specific goal: I separate the money I’m setting aside from the rest of my normal, checking account money. 

This makes a very clear distinction between the money I’m saving for my goal (the down payment) and the rest of my available funds so I’m not as tempted to spend the savings. 

Some accounts even let you make savings buckets or “vaults” within the account, which allow you to designate certain chunks of money toward different things. 

If you do this, be sure to opt for a high-yield savings account that earns you a higher interest rate. That way, you’ll earn some extra money on top of your savings.

I’m a fan of the SoFi Checking and Savings Account, which earns up to 3.80% APY. Another one is the CIT Bank Platinum Savings, which earns up to 4.00% APY. 

COMPARE: Best High-Yield Savings Accounts

You can also transfer your down payment savings into a certificate of deposit (CD). This is another type of savings account that generally has a high interest rate. 

The catch with CDs is that you can only withdraw your money after a certain period has passed — otherwise, you may be charged a penalty. Not all CD accounts charge penalties, though, so check before committing in case the perfect house appears before the term is up!

TL;DR: Saving for a Down Payment

The average down payment for first-time homebuyers in the U.S. is around 6%, although you’ll need to put down 20% if you want to avoid paying private mortgage insurance.

But even just 6% is a big chunk of money, so you need to be smart about saving for it. Find ways to cut unnecessary expenses or earn more income (maybe by asking for a raise or finding a side hustle). 

Most importantly, put the money for your down payment where you can’t easily spend it. A high-yield savings account or CD will help you earn interest on your savings while keeping it safe from temptation!

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