Living in the Bay Area is not cheap. In fact, three of the top 10 most expensive cities in the nation are in California’s Bay Area, with San Francisco coming in at number two. If you want to buy a home in this prestigious part of the country, anticipate needing a large down payment — like, $200,000 large. If you’re like most average income earners, you may wonder how you will ever save a down payment big enough to buy your dream home. Hopefully, these tips can help. But first, here’s why you need a down payment.
When It Comes to Down Payments, Bigger Is Better
Traditionally, down payments are 20% of the price of the home. However, untraditional mortgage lending options are becoming increasingly popular, in large part because they extend loans in exchange for little to no down payments. For instance, you can get a home loan through Rocket Mortgage with just a 3% down payment. Navy Federal requires no deposit. However, paying less upfront is not always best.
Low down payment loans almost always include extra expenses (with the exception being VA home loans). For instance, low deposit mortgages often come with higher interest rates. Lenders also require low- to no-deposit borrowers to invest in mortgage insurance. The average cost of private mortgage insurance is between 0.55% and 2.25% of the original loan amount. Though you can save money upfront by skimping on the deposit, you could end up paying much more over the life of your loan as a result.
How To Save for a Down Payment
Assuming you don’t want to throw money away on interest and PMI, you should start saving for a down payment. But where do you begin?
1. Free Up Some Cash
First things first — look to your budget to find places where you’re just throwing money away. Think credit card interest, unused subscriptions, hidden fees, unnecessary coffee runs, and parking convenience. Add up the monetary “waste” and decide what you can do to reduce it.
For instance, paying off your debt can help you save thousands of dollars on interest. Taking the extra 10 minutes to find street parking instead of parking in the structure can save you $100 or more a week. Calling out your service providers on hidden fees can reduce your monthly output by hundreds of dollars.
2. Open a High-Interest Savings Account or CD
Once you free up some cash, take that “found” money and put it in an account that will generate even more. Traditional bank savings accounts come with APRs of between 1.50% and 1.75%, but if you’re willing to try untraditional options, you stand to gain more. For instance, some credit unions pay as much as 2.05% APY on balances, while Certificates of Deposit could generate a 2.5% return.
Don’t just shop around for the best APR, however. Also, look for bank bonuses. For instance, many of the larger banking institutions offer several hundreds of dollars in cash bonuses for new account holders. A personalized financial advisor at Summitry can help you explore investment options so your money works harder for you.
3. Tap Your IRA
Tax law allows first-time homebuyers to borrow up to $10,000 from their IRAs, tax-free. If you’re married and your spouse does the same, that’s an easy $20,000 toward your new home.
4. Take Advantage of Those Windfalls
Did you receive a COVID-19 stimulus check for you and your dependents? What about a tax refund? Does your boss issue you a birthday bonus every year? Though it may be tempting to use those windfalls as a chance to splurge, put it in a savings account instead. This is a quick and easy way to build your deposit without having to dip into your regular income.
If you want to buy a home in the Bay Area, you will need a hefty down payment. Use the tips above to start building yours today.
