Here's How You Can Start Saving for a Home Right Now

The U.S. housing market has seen significant fluctuations and unpredictable interest rates, making homeownership harder to achieve for many. According to Redfin data, home prices increased by 4.8% in March 2024 compared to the year before, with a median price of $420,321. This price hike is attributed to factors like limited housing inventory, strong demand, and rising construction costs. The national average for a 30-year fixed mortgage stands at 6.8%, up by 0.3 points from the prior year. These higher borrowing costs have made monthly mortgage payments much more expensive for prospective buyers.

Although these numbers might seem discouraging, it's important not to give up in this challenging environment. Homeownership still offers many long-term and short-term advantages. Saving enough for a home may feel daunting, but there are practical steps you can take today to prepare. By creating a solid savings and earning strategy, you'll be on your way to owning a home sooner than you expect.

Steps You Can Take Right Now to Save for a Home

One of the most important things you can do when preparing to save for a house is to set a clear savings goal. This amount will depend on factors like the buyer, the type of home, and the location. Do your homework and settle on a realistic figure. Be sure to factor in expenses like the down payment (typically ranging from 3% to 20% of the home's price), closing costs (around 2-5% of the loan), inspection fees ($500-$1500), and moving expenses.

If you're considering an older home or a fixer-upper, don’t forget to plan for any repairs that may be needed before moving in. Some homes only require minor cosmetic updates, such as replacing toilet seats or painting walls. Other homes, however, may need more extensive renovations, and you might be able to include those repair costs in your initial mortgage loan.

"Reach out to a loan officer who specializes in first-time homebuyers to get started with a plan," recommends Fred Bolstad, head of retail lending at U.S. Bank. "Participating in a local first-time homebuyer seminar is an excellent way to discover potential down-payment assistance programs available in your area. This will give you insight into how much you need to save for your future home. While many assume 20% is required for a down payment, there are many loan options, especially for first-time buyers, where you can put down as little as 3%."

After you've decided on a reasonable home price, you can reverse-engineer by creating a realistic savings plan. With a clear homeownership goal in sight, you'll be more motivated to set a budget and stick to it.

"Understanding your income, expenses, and where your money is going is essential," says Brandon Norwood, a licensed financial planner and owner of Oak City Financial. "This awareness helps you determine how much you can allocate for saving towards a home. Many people are surprised to find that they are spending more than they realized on certain things, presenting an opportunity to cut back and redirect funds to savings. There are various apps available, like Empower (formerly Personal Capital), YNAB, and Monarch, that can assist with financial tracking and budgeting."

Habits to Start Now in Pursuit of Your Goals

If you’re not already doing so, Norwood strongly recommends automating your savings. "It’s a simple but effective way to increase your savings," he explains. "By automating your savings contributions, you eliminate the effort and temptation to spend that money elsewhere. People who automate their savings early in the month tend to meet their goals more successfully than those who try to save at the end of the month manually."

Consider looking for ways to earn extra income to boost your savings. "Think about leveraging skills you already have (like those you use in your job) to create a side hustle or part-time job," Norwood suggests. "For example, if you're a recruiter, you could earn additional income by offering resume writing services."

In addition to adopting good money habits, it’s important to work on eliminating poor ones. "Small changes, such as eating out less or only buying essentials, can make a difference," advises Bolstad. "The sacrifices you make now will help you build wealth through homeownership and equity in your home. Focus on eliminating unnecessary expenses and see how much you can save by cutting back on anything beyond your basic living costs."

While nobody is advising you to live like a minimalist right now, it’s important to resist lifestyle inflation. Lifestyle inflation refers to the tendency to increase discretionary spending as your income rises. This can result in instant gratification and retail therapy undermining your long-term financial growth. Instead, plan ahead to save raises, tax refunds, and bonuses to pay off high-interest debt, like credit card bills, or funnel that money into your ‘home savings’ fund. Paying down debt will free up funds for your savings and improve your credit score, which could lead to a lower mortgage interest rate later.

In the long run, practicing financial discipline today can lead to successful homeownership down the road.

Best Places to Keep Your Savings

"If you're saving for a goal within the next five years, it’s best to keep the money out of high-risk investments to protect it," advises Norwood. "This ensures that your cash stays secure and accessible when you need it. Many people find it helpful to put their savings in a high-yield savings account or explore current rates for certificates of deposit (CDs)." Money market accounts are also worth considering.

Some individuals can take advantage of tax-advantaged retirement accounts, like the 401(k), TSP, and IRA, which may be tapped for home or personal loans (such as for a down payment). "Certain workplace retirement plans, like 401(k)s, offer options such as penalty-free withdrawals for first-time homebuyers or loans that can be used towards buying a home," Norwood explains.

Withdrawing funds from your retirement plan may come with penalties if taken before retirement age, but borrowing from your plan can be advantageous. Essentially, you’re lending money to yourself, making you both the borrower and the lender. This can work well for those employed in stable industries with little risk of job loss. You can automate repayments directly from your future paychecks.

This method has its pros and cons. If the stock market performs well during the duration of your loan, you could miss out on those gains. On the other hand, these loans generally have lower interest rates compared to those offered by commercial banks, and they won’t impact your credit report.

Additional Money Management Tips

Norwood advises, "It’s important to educate yourself by learning as much as possible about the home-buying process, mortgages, and the real estate market. Consulting with an expert in the field can provide valuable insights and guidance. Being well-informed will help you make better decisions when saving and purchasing your home."

Explore various assistance programs in your area. Some may be provided by local or state governments, while others are offered through organizations like NACA and individual banks. Many first-time homebuyer programs offer benefits like down payment assistance, lower interest rates, or other utility discounts. It’s essential to research the specifics of each program, as some may have residency requirements, tax implications, or other restrictions that could affect your future plans.

If you happen to receive an inheritance or a cash gift from a close family member or friend, don’t spend it on consumer goods. While you will need to properly document this money for your loan, it can be used towards your down payment on a home. This is a great way to make the most of an unexpected windfall.

"Purchasing a house is the most significant financial transaction for most people," says Bolstad. "A well-organized monthly budget that covers your fixed expenses and eliminates unnecessary spending will help you reach your goal of homeownership as quickly as possible."

If you find it challenging to save for a home, developing a budget now will help you build the discipline required to maintain your home for the long haul. Remember, a home often represents a 30-year commitment—there won’t be a landlord or building manager to call when something breaks, like a leaky faucet or a broken appliance. Instead, you’ll be in charge of routine maintenance and repairs, so it’s essential to set aside a healthy cash reserve for seasonal and emergency needs.