How To Save Money For A Down Payment While Renting

Wendy Weir
Published on January 23, 2017

How To Save Money For A Down Payment While Renting

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When people start thinking about buying versus renting, there are so many different perspectives – it can become quite confusing; all our present debt, paying back student loans, maintenance costs, taxes and the list goes on !!!

Buying a home is an expensive transaction. Whether you finance it for 10 years or 30 years, it will be one of the most expensive items in your life. That is why it takes a solid plan to save up enough to cover all the costs, plus prepare for future homeowner expenses.  There are specific things you can do now to prepare yourself in going from renter to owner.

Step 1: By The Numbers

The first method is to understand the basic math of how to compare renting versus buying. There are components to this step:

  1. Calculate the monthly cost of homeownership.
  2. Calculate the tax benefits of homeownership.
  3. Subtract the tax benefits from the cost of ownership to get the “after tax cost.”
  4. Compare the after tax cost to market rent for a comparable property.

Answer This Question: How Much Do You Need?

  

Knowing how much you need for a down payment via Karen Highland is essential. First and foremost, you will have to set a goal amount. The easiest way to do this is to use one of the many online mortgage calculators to determine a price range for your home. Using the expected monthly payment and the current interest rate you can get a ballpark for the expected home’s price. Then you simply need to calculate 10% and 20% of the price.

One major caveat: if you are currently paying rent and you anticipate paying a similar amount for a mortgage payment, you should add 15% to 20% to the rent amount. This will help you cover basic maintenance and repair items that come with owning a home. In an example, if you currently pay $1,000 per month in rent you should expect to set aside $1,200 per month to cover the mortgage and repairs.

 

Let’s Make This Easy 

Take the current mortgage rate, which can change daily, to figure out what your monthly cost would be.

– Mortgage Calculator,  Including PITI – Principal, Interest Taxes and Insurance.

The Federal Tax Deductions homeowners get for Mortgage Interest and Property Taxes saves you Hundreds of Dollars per month. (To calculate estimated tax savings, multiply loan amount by interest rate and multiply purchase price by property tax rate estimate of 1.2 percent. Add these two numbers, and multiply the result by an income tax rate estimate of 30 percent, then divide by 12 to get a monthly figure. Always consult your tax adviser on any tax-related matters for a precise calculation specific to your situation. Tax Deductions via Bill Gassett

If you do these calculations in other areas such as the Dallas-Fort Worth metro, where home prices are lower and rents are higher (relative to ownership costs), the math will more clearly support buying over renting. In some markets, buying can be cheaper than renting even before incorporating homeowner tax benefits.

Doing these rent-versus-buy calculations for your own market only takes a few minutes. Research the rents versus home prices based on the mortgage – be sure to include PITI – which is Principal, Interest, Taxes and Insurance.

Step 2: Time will tell

Of course, there are always additional expenses to owning a home, so First Time Home Buyers  need to know what to expect via Kyle Hiscock.        

The second method for deciding if it’s better to rent or own is to understand how long it takes for buying to become more financially advantageous than renting. That’s kind of an easy one to answer – Why pay a Landlord instead of building equity for your own future?  Ultimate Guide To Buying A Home via Ryan Fitzgerald
Once you’ve analyzed both of these rent-versus-buy methods for your target area, you’ll have a strong command of which option makes the most financial sense. Then the rest of your rent-versus-buy decision is about lifestyle choices like whether or not you want mobility, maintenance responsibility, or freedom to upgrade your living space.

Listed below are some ideas to help you reach your goals fast.

 

Down Payment Saving Tip #1: Downsize Now To Save For The Future

One radical way to save money is to downsize now. If you are living in a 2 or 3 bedroom place you could downsize to the next smallest place. This could save you a few hundred dollars per month in rent. It would also save on monthly utility expenses.

Alternatively, if you have an extra bedroom or maybe a basement that is not in use, you could rent it out and save that money.

Another way to downsize is to cut back on expenses. You can likely find ways to cut back in the following areas in order to save more money:

  • dining out
  • entertainment expenses like movies, plays, etc
  • travel
  • morning coffee – at home vs out
  • cell phone bill – try a less expensive carrier
  • bundle your – cable tv, phone, tv and internet

 

If you cut out all of the extra stuff that is not required for living expenses, you could save a lot of money in just two years. Of course you can still have fun. Invite friends over for cards and games, make it potluck so everyone brings a dish to pass. Take a few road trips so you avoid the plane fare and stay with friends instead of at hotels…

Most radical idea: If you are making payments on your car/truck and you have over 3 years left on the loan, consider selling it. You could use the local bus service, a bicycle or carpool with friends. Or, you could find a really cheap car and buy it for cash. Then, the amount you were using for the car payment can go to savings.

how-to-save-for-down-payment-while-renting-2

Down Payment Saving Tip #2: Gererate Money from More than just your job.

Most people look at saving for a down payment and respond with “I don’t make enough money on my job to save that much.” This is the wrong attitude to take. Instead, you should say to yourself “HOW many different ways can I make money?”

The following list is just a start of some of the ways you can make extra money

  • get an extra part-time job
  • offer your services for hire – mow lawns, clean houses, babysit, tutor children after school
  • sell your stuff – if you have anything in your possession that you can live without, sell it on eBay or at a garage sale
  • over time – if you work at a place that offers overtime, sign up for some extra work

 

Keep in mind, that this is a temporary idea. Nobody is suggesting that your work 14 hours a day, 6 days a week for the rest of your life.

 

Down Payment Saving Tip #3: Borrow from Your Retirement Accounts

If you have been investing in an IRA or 401k account it is very likely that you could borrow money from the retirement fund and use it as a down payment on a home.

This is a simple way to get the cash you need, HOWEVER, it comes with significant risks.

First, in the case of a 401k plan, if you leave the job you may have to repay the loan in full at once. Secondly, taking the money out will reduce the amount you have in savings and will reduce the amount you can save over time thanks to compound interest.

If you are a dedicated saver and feel that you can replace the money rather quickly, this is not a terrible option. But you need to be aware of the risks before taking money from your retirement account.

 

What About No Down Payment Mortgage Programs?

Keep in mind that if you are looking at one of the no down payment loans such as the VA mortgage or the USDA mortgage, this type of plan for saving money is still a good idea. Even if you are planning to get a gift from a relative and use the money for a down payment on a FHA home loan, you still need some money saved up. There are always additional costs, like renting a moving van or some extra closing cost, which will appear out of nowhere and demand your money. Avoiding no down payment mistakes is crucial! 4 articles via Luke Skar

 

Summing Up How To Save Money While Renting

If you have grown tired of your current living arrangement and want to develop a plan to buy a home via Paul Sian, now is the time to start saving. By putting these suggestions in action you will reach your goal much sooner than you anticipated.

 

Additional Home Buyer Resources
20 Cold Hard Facts In Real Estate Home Buying via Lynn Pineda
Saving For A Down Payment On A House via Kyle Hiscock
Mortgage Guide That Every Home Buyer Should Read via Wendy Weir
Fantastic First Time Home Buyer Tips via Listly

 

Wendy Weir Relocation – Real Estate Agent, Relocation Specialist, Birmingham, MI

Co-Author Luke Skar – MadisonMortgageGuys.com<https://www.madisonmortgageguys.com/> NMLS ID #1016

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