Any tips for when you're saving for a house

[Greencheese]

Just had a discussion with the DF yesterday about our 5 year gameplan post wedding day and the idea of housing has started coming into play. Does anyone have any good tips for saving for a down payment? With about 5 years until we'd like to make the big leap we're currently socking away money after funding our 401ks to match, HSA, and Roth IRAs. I'm looking into opening an online savings account to keep that money from encouraging lifestyle creep but should I be doing anything else that you may have found useful?

 

[Walt34]

You must know someone who makes half of what you do. Live like they do and save the rest.

 

[Meadbh]

My advice would be to buy CDs that will mature around the time you will need the money. If you will be saving over a period of years, build a ladder. Reduced liquidity, out of sight, out of mind.

 

[Markola]

The way we first did it in 1995 in our 20s was not by saving so much but by reducing the down payment required in the first place. There used to be a very helpful national housing nonprofit called ACORN, which taught classes in home ownership and, in return for your attendance, would qualify you for very low downpayment programs they negotiated with banks. We did have to pay private mortgage insurance (PMI) for a while until our equity built up. Unfortunately, this excellent group no longer exists because...no, not going there, you can Google it. Anyway, you might look around for current similar housing programs or ask a large bank if they can refer you to such income-dependent programs that they work with to help get people into houses.

On the other end of the spectrum, for inspiration you might read the book Total Money Makeover by Dave Ramsay. He writes about people who lived frugally renting small places for a few years while they crushed their savings in order to pay 100% CASH for their first house. In hindsight, I wish we could have done this. Good luck.

 

[Bamaman]

Take your lunch to work everyday.
Quit eating out.
Stay out of bars and avoid drinking alcohol.
Drive older, paid for automobiles that don't require expensive collision/comp insurance.

And when you're ready to buy, get pre approved--and buy a foreclosure that can be bought substantially below market value. A little paint goes a long ways.

 

[W2R]

You must know someone who makes half of what you do. Live like they do and save the rest.

+1


Cut back until you are living on about half of your take home pay or less if you can manage it. Money will build up and before you know it you'll have your downpayment.

Once you have saved up your down payment, I'd suggest that you continue saving at that rate. You can invest the extra for retirement, or if you are inclined to do so then you can use it to pay off your house.

 

[Gumby]

Do not finance any purchases between now and then -- that means no new car. Drive the one you have until it dies and can't be resurrected.

Do not carry a credit card balance.

Do not sign up for anything that is based on a subscription payment model - like that fancy new iPhone, super duper cable TV, satellite radio, gym membership, etc.

And this is the most important -- religiously track every penny you spend. Write it down every day. You'll be much more able to identify where money is trickling away and put an end to it.

 

[gauss]

Make sure that you are purchasing a house for the lifestyle reasons and not necessarily the investment reasons.

Some Real Estate agents may try to talk up the investment aspect. Take it with a grain of salt and consider the source.

If you live in a house that you have lots of equity in your will sleep well at night despite fluctuations in market value.

Most of all -- read Stop Acting Rich: ...And Start Living Like A Real Millionaire ... from the author of The Millionaire Next Door to understand the lifelong effects that neighborhood choice will have on you.-- Very counter-intuitive.-gauss

 

[jollystomper]

You must know someone who makes half of what you do. Live like they do and save the rest.

+1

When DW and I married we lived off of a little less than my salary, saving a little of mine and all of hers. We resisted the siren calls from peers at the same stage of marriage and her MIL to splurge and readily accepted folks thinking of us as "cheap". It has been more than worth it in the long run.

 

[Texas Proud]

Have not had that question asked in a long time....

But, my answer was simple... calculate what you housing payments will be (be realistic), including property taxes, insurance and maintenance... also include an increase in utilities and even gas if you are going to live farther away than you do now....


Now calculate how much you are spending on these items right now...

Whatever the difference is you put in a savings account (or ST bond fund at Vanguard).... If you ever touch this money you can not afford that house... period...


Now, in 5 years you will have a good down payment ready to go... and you will know you can afford the house as you have been paying for it the last 5 years...

 

[papadad111]

Most of all -- read Stop Acting Rich: ...And Start Living Like A Real Millionaire ... from the author of The Millionaire Next Door to understand the lifelong effects that neighborhood choice will have on you.-- Very counter-intuitive.-gauss

+1 That was a very good book. A follow up of sorts to Millionaire Next Door with lots of research insight.

 

[Greencheese]

Wow great advice! Currently we track all expenses via spreadsheets and I got rid of my leased auto (long story but had to get a car without prior planning) and take public transit nowadays. Currently working on cutting down on eating out but thankfully we only do that once a week or so, typically Saturday night socials.

Definitely looking at a house as a lifestyle thing, real estate in Illinois isn't the surefire way to make a buck. If one is looking at the suburbs do people usually experience better success being in a neighborhood solidly like themselves/mixed income or be the "poorer" family in a wealthier area? Specifically northshore or adjacent suburbs. Just looking at prices on Zillow for fun, could get a nicer house with some amenities like less appealing parks to trade off or get the smaller house with some tradeoffs in size and moderness but would have better amenities and great schools.

 

[ponyboy]

5 years out isnt that long. Put the money in a savings account that is yielding a 1% return.

No one knows what the market will do. Would you be comfortable with a $100,000 down payment on a house fall to $90,000? I wouldnt.

Also...just because you are approved for a loan at xx amount doesnt mean you have to spend that much. Live below your means. Try not to buy a house that is 2.5x your combined income.

 

[MichaelB]

Definitely looking at a house as a lifestyle thing, real estate in Illinois isn't the surefire way to make a buck. If one is looking at the suburbs do people usually experience better success being in a neighborhood solidly like themselves/mixed income or be the "poorer" family in a wealthier area? Specifically northshore or adjacent suburbs. Just looking at prices on Zillow for fun, could get a nicer house with some amenities like less appealing parks to trade off or get the smaller house with some tradeoffs in size and moderness but would have better amenities and great schools.

Northshore Chicago is not inexpensive, but it is nice. Where you choose to live is all about work commute and schools, and there is no "right" answer. I tell my kids to think of their house as an expense with no investment value.

 

[Texas Proud]

I might get some negative comments on this, but so be it....

I bought my first house many years ago when I was single... it was a nice neighborhood, but not expensive in any way.... lived there 25 years... the neighborhood was kept up and it looked great... there was a mix of blue collar workers and young professionals... IMO, a good place to live...

Now the housing crisis comes.... people start to lose their homes, prices drop by 30% to 50%.... now the people who are moving in are lower level... they do not take care of their home (if they even own it) and every kind of work truck is starting to be parked all over the place... and it seems that some must be running a business out of their house against neighborhood rules as there might be 5 or more trucks.... now, as far as anything else happening than the look and feel of the neighborhood, no... nothing bad about it... just that when you drive through a neighborhood you get a 'vibe'... and the vibe of my old neighborhood went way down...

My new neighborhood is more like what my old neighborhood was for 20 of the years I lived there.... but we are in a more expensive neighborhood with houses that are about twice as large as the old place.... for me, I would buy up, which is not to say pay more, just be in the better neighborhood....

 

[frugal-one]

Know people who were property managers for a building. They lived there and had no rent and banked that amount every month for their own house. Of course, they had to maintain building and deal with tenants but found in a few years they had the required down payment. Worked for them. YLMV

 

[imoldernu]

Give this website a look...

City-Data.com - Stats about all US cities - real estate, relocation info, crime, house prices, cost of living, races, home value estimator, recent sales, income, photos, schools, maps, weather, neighborhoods, and more

This gives comparison statistics of cities... income, home value, schools, etc.
Depends on your needs... distance to work, lifestyle etc, but the differences can be huge.
We used to live next to Naperville... current avg home price is $372K We now live 85 miles away, and the avg home price is $115. A comparable house would be about $225K.
Some other considerations... chances of employment change? Having to sell in a slow market could be costly. We had 22 total moves, fortunately many years ago, when prices were rising so we made out well on every move. Having to move and owning two homes is a downer, very expensive and nerve wracking.

One possibility in choosing for value, rentability or possibly a duplex, that could limit your exposure, and provide some offsetting income.

You asked about saving... Try this. for possible low downpayment loans... FHA or PMI.
5 Mortgages That Require No Down Payment Or A Small One | Bankrate.com
and one more site:

How to Buy a Home With a Low or Zero Down Payment - realtor.com

and what Walt34 said...

You time horizon is good... and methinks you're headed in the right direction. Best of luck!

 

[Markola]

My new neighborhood is more like what my old neighborhood was for 20 of the years I lived there.... but we are in a more expensive neighborhood with houses that are about twice as large as the old place.... for me, I would buy up, which is not to say pay more, just be in the better neighborhood....

Seems a completely reasonable choice based on lifestyle preferences. DW and I have made similar choices over our 4 houses so far. Altogether, I just don't see houses as an investment that grows much but instead more like a physical, very low interest savings account that serves the practical purpose of keeping you out of the rain and various other enjoyments and pains in the neck. Looking back on the posted sales prices of our current home over 15 years, it has appreciated less than 2%/year over all kinds of markets during that time, counting upkeep. Financially, we'd probably have been better off just renting and banking the saved upkeep costs into growing our paper assets, but we owned rather than rented due to just personal preference, really.

 

[heeyy_joe]

Buy the cheapest house in the best neighborhood you can afford that has a superior school district.

 

[Texas Proud]

Seems a completely reasonable choice based on lifestyle preferences. DW and I have made similar choices over our 4 houses so far. Altogether, I just don't see houses as an investment that grows much but instead more like a physical, very low interest savings account that serves the practical purpose of keeping you out of the rain and various other enjoyments and pains in the neck. Looking back on the posted sales prices of our current home over 15 years, it has appreciated less than 2%/year over all kinds of markets during that time, counting upkeep. Financially, we'd probably have been better off just renting and banking the saved upkeep costs into growing our paper assets, but we owned rather than rented due to just personal preference, really.

It is not an investment....

My first house cost me $66K.... lived there for 25 years and sold for about $115... not a great 'return'....

Current house bought during the RE crash, so cost $160K and is probably worth in the $230ish range... been here 7 years... most of that is due to the recovery of RE, so I guess you could put some of that gain on the old house...

 

[Markola]

It is not an investment....

My first house cost me $66K.... lived there for 25 years and sold for about $115... not a great 'return'....

Current house bought during the RE crash, so cost $160K and is probably worth in the $230ish range... been here 7 years... most of that is due to the recovery of RE, so I guess you could put some of that gain on the old house...

That's how I think of it too: What is my total real estate "investment" gain over 20 years of owning houses compared to the opportunity cost had I instead rented at a stable rate and invested in the markets all of the down payments, commissions, mortgage fees/interest and capital costs of owning those houses. I am sure I would be much wealthier today had we rented. Yet, there were benefits to "owning", or more properly, paying a bank rather than a landlord for shelter. I never had to deal with someone demanding to come in the house for maintenance of their property; when we sold our first house the proceeds paid off DW's student loans; we have had the greater satisfaction of living in stable neighborhoods and forming long-term friendships with neighbors rather than transient apartment complexes or blocks; and it is nice to have the flexibility to remake the homes and yards to function for us without getting anyone's permission. Purely financially, though, in hindsight we shoulda rented.

 

[athena53]

Going back to the savings question: it's all about priorities. Take a close look at all your expenses and see where money is going on things that you don't find all that useful or enjoyable. Monthly fees are especially fertile ground. Can you cut back on your cable or cell phone plans if you have them? Are there software subscriptions you don't use and can cancel? Can you search for discounts and deals on things? Do you have too many fee-carrying credit cards? They're all small amounts but over time they add up.

On another Board where I post frequently, the advice would be to try and find ways to increase your income, but that's not always possible.

Finally, don't give up all the good stuff. It sounds like you have a healthy perspective. It might be good to go into starving college student mode if you're trying to pay off $50K worth of credit card debt, but figure out what you REALLY enjoy and find a way to keep it in the budget. Home ownership is great, but not always a fantastic investment.

DH and I are definitely millionaire-next-door types-I clean my own house and paint my own walls, my cell phone bill is usually $17/month (thanks, Ting!), we shop art Costco, and we drive very mediocre but reliable cars, bought used. We're also going to Iceland in August. In Business Class. Priorities!

 

[Markola]

Thanks for that Ting tip, Athena53. I just looked at their site and was impressed.

 

[Big_Hitter]

After you max our your 401k, I'd suggest investing in mutual funds via payroll deduction. That way you never see the $$$ in your checking account.

 

[Texas Proud]

That's how I think of it too: What is my total real estate "investment" gain over 20 years of owning houses compared to the opportunity cost had I instead rented at a stable rate and invested in the markets all of the down payments, commissions, mortgage fees/interest and capital costs of owning those houses. I am sure I would be much wealthier today had we rented. Yet, there were benefits to "owning", or more properly, paying a bank rather than a landlord for shelter. I never had to deal with someone demanding to come in the house for maintenance of their property; when we sold our first house the proceeds paid off DW's student loans; we have had the greater satisfaction of living in stable neighborhoods and forming long-term friendships with neighbors rather than transient apartment complexes or blocks; and it is nice to have the flexibility to remake the homes and yards to function for us without getting anyone's permission. Purely financially, though, in hindsight we shoulda rented.

Not even close here.... renting is much more expensive than buying if you plan on staying awhile...

My all in cost for a house is maybe 60%.... I just looked and the RE site does not show any houses for rent in my neighborhood, so I looked at a similar one a few miles away.... AND, that is not counting the pay down on the mortgage, just cash flow...