Thursday, July 16, 2009

Money Saving Tips for Future Homeowners

Aha, a new post idea thanks to my newest married friend and blogger with the best name ever, Kristin. :)

Kristin asked for money saving tips to save for a house. Obviously, a down payment on a house is a HUGE chunk of money, and it's not always easy to get there. But, there are a few ways to minimize that amount of money, even in this lending environment.

*FHA Loans are a great tool for first time home buyers. They allow buyers to put as little as 3.5% down. The money is a bit more expensive (higher up front costs and a higher interest rate than a conventional loan), and it takes a little more paperwork and time to qualify, but it can be completely worth it. You also have the option of financing some of your closing costs, which can help with that up front expense. There's also a limit on the amount of the loan, which I believe is around $350,000.
*Depending on your area, you can also put as little as 5% down on a 30-year conventional mortgage. However, if you finance more than 80% of your purchase price, you will be required to have Private Mortgage Insurance (PMI), which varies depending on the percent you put down. We are putting 10% down, so we have to pay an additional 62 basis points (0.62%) annually on top of our interest rate. Once you're down to 80% LTV (loan to value), you no longer have to pay this expense. This can occur through principal paydowns, investment in your home's value, appreciation of your asset, or more likely, a combination of these three.
*You also have the option of taking out a conventional 80% LTV loan and an additional loan to cover the remaining down payment less what you can put down (most often, not less than 5% down). This second mortgage will be at a significantly higher interest rate, so you'll want to pay it off as soon as possible.

Now that you have some options for financing, here are some tips to save extra cash.

*DINK status doesn't hurt (double income, no kids).
*BUDGET!!! BUDGET!!! BUDGET!!! Did I mention, budget? Be realistic and stick to it. Make weekly/monthly savings contributions part of your budget, not an afterthought.
*Do you have a daily Starbucks habit? How about eating lunch out every day? A $4 latte 5 days per week costs you $1,040 per year. Spending $8 on lunch 5 days per week costs you $2,080 per year. Invest in a milk steamer and make your own lattes, and limit eating out. I try to limit eating lunch out to once per week, and Matt and I typically don't eat out for dinner more than twice per week. Actually, since we only see each other on the weekends these days, I think we've only eaten out once total in the past 3-4 weeks. Even if we go somewhere cheap, dinner and a few drinks costs $50. We can have dinner and a few drinks at home for under $20.
*Unless it is an emergency, do not touch your savings account. Until this week, we never once transferred money from savings to checking.
*If you're the type of person that has a hard time not spending what is in your checking account, make a separate savings account for your house and for other items you want to save for (i.e., vacation, car, Christian Louboutin heels), so that you don't have to dip into your house savings.
*Prioritize what is really important. If buying a house is high up on your list, forgo the nice, expensive apartment and save the difference each month toward your down payment. Although our condo is pretty cute, we could have lived in a nice rental house, but we didn't see the point in spending that much on rent, so we went with the 2/1 condo that fit our lifestyle perfectly and allowed us to pocket a lot more money each month.
*Shop sales and use coupons. Fiddledeedee is a blog I use to shop Publix sales. I try to plan my weekly menu based on what is on sale, and if something is BOGO that I use a lot (olive oil, chicken stock, etc.), I stock up when it is on sale, even if I don't need it at the time. I also rarely buy clothes that aren't on sale, and as much as I'd like a Louis Vuitton bag or a pair of Christian Louboutin shoes, I wanted a house more.
*Sell what you don't need anymore. I recently went through my closet and compiled an embarrassing five shopping bags worth of clothes I don't wear anymore. I took them to Plato's Closet and made almost $150. I'm donating what's left to the Junior League of Atlanta's Nearly New Shop. If you have items in good condition, try consignment or selling them on eBay.
*If you have existing debt (with the exception of student loan at a low rate), put away enough money for an emergency fund and pay off your existing debt before you saddle yourself with a mortgage. Plus, being debt free is going to make the loan approval process much better.

Matt and I are lucky that we are both doing well in our careers. We don't spend beyond our means, but we don't have to scrape by. However, without solid goals and a money saving plan, we would not have been able to save so much so quickly. One other tip for purchasing a house, don't forget to add on taxes and insurance to your monthly payment when figuring out what you can afford. Taxes are high in Atlanta, so that is unfortunately a large part of our payment (around 1/5 of our total monthly payment!).

So, do any of you have some good, money saving tips you'd like to share with your blogging buddies?


MrsSouthernBelle said...

These are great tips! Ive been wondering about FHA loans and you actually put it into plain english! Thanks!

Sarah @ Fiddledeedee said...

Thank you for the link! Keep on saving :)

Kristin said...

Awesome post. Thanks.

CoachingByPeter said...

Before purchasing a property, primarily secure that you have enough source of income. Be certain that you have sufficient funds on a long-term basis to insure that you'll be capable of paying your monthly amortization.

Heather said...

I wonder what it's like to be a DINK!! :) Thanks for all the great tips, you rock!

Marden Family said...

Excellent advice- you are such a smarty :) Looking forward to our conference call today! I still can't get over the fact that we're all so busy we have to schedule a conference call to catch up, but I am sooo excited about it!