How to Save for a Down Payment on Your Dream Home

If you’re trying to save for a down payment on a home, it can feel impossible at times. Luckily, there are lots of tools—both online and off— that can help you break your goal down into more manageable bits. These apps, programs, and banking options can all help you save that down payment and get into your dream home.

With the real estate market so volatile and home prices sky-high right now, it’s easy to get discouraged if you’re trying to save for a down payment. That’s why it’s helpful to use as many tools as you can to reach your goal. Let’s explore some of them, and how they can help you purchase your new home as soon as possible.

How Much Do You Need for a Down Payment?

First, you have to decide how much you need to save. This is important because having a specific goal will guide your monthly budget. Take a look at the homes for sale in the area(s) you’re interested in to get a general price range.

Next, use a mortgage calculator to estimate your monthly payments. Dave Ramsey, personal finance expert and host of The Ramsey Show, recommends limiting your mortgage payment to 25% of your household’s monthly take-home pay.

Even though it’s best to aim for a 20% down payment, it’s okay to put down less, as long as you’re prepared to pay private mortgage insurance (PMI). Just be sure to include any extra costs in your overall budget.

Once you have a concrete goal in mind, it’s time to save, save, save. The more you save, the sooner that dream home can become a reality. It’s absolutely possible with enough planning, determination, and commitment.

Research First-Time Home Buyer Programs

Most states have programs that assist people who are purchasing their first home. Some of these include down payment assistance programs, lower-interest mortgage loans, special assistance for those who work in certain fields, and substantial income tax credits. Be sure to investigate the options that are available in your state.

There are also some national programs, including special loans, deals on foreclosed homes, and 100% financing on properties in rural locations.

If you find a program that will work for you, you can adjust your budget accordingly and cut your saving time!

Use a Budgeting App

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Obviously, the first step toward saving is tweaking your budget. If you don’t have a solid budget in place, it’s time to get one!

The key to a successful budget is keeping track of everything—yes, even that $2 cup of coffee or $10 haircut. At the end of the month, thoroughly review all of your expenses and see what you can cut. If you have a partner, be sure to consult him or her, as well. Trust us, there’s always something you can cut.

For example, say you buy a $2 cup of coffee five days a week. That’s $40 a month. It seems like a bargain in the moment, but that adds up to approximately $480 per year, $960 over two, and $1,440 over three years. Yikes!

We recommend using a budgeting app because it’ll help you keep your spending trends up-to-date, while also allowing other family members to input data in one convenient place. Any of these personal finance apps can help you create and maintain your budget:

Mint: This free app is perfect for managing all aspects of your budget. It syncs with your bank and credit card accounts and offers in-depth insight into your spending trends. You can add your own categories, set alerts for bills, and specify budget limits.

You Need a Budget: This app not only helps track your spending habits, but it also actually teaches you how to manage your money better. There are fun graphs and charts, perfect for visual motivation. It’s free for 34 days, then it’s $11.99 per month or $84 per year. Check out the video above for advice from YNAB on how best to maximize the app’s savings component.

PocketGuard: This app helps you set up payoff plans for your debts. It also allows you to track your budget, bills, and accounts all in one place. You can also always see how much cash you have available to spend.

Create a Hard-Copy Chart

Sometimes, a paper chart can be far more effective than keeping track of yet another app. It can be especially helpful if you display it in a prominent place, like above your desk or on the fridge.

This fun down payment savings game chart is an excellent option. There are also plenty of cool designs on Etsy. Or, you can get creative and make your own on paper, or using a dry erase or chalkboard.

Feel free to use stickers or offer rewards along the way, such as an ice cream night or pizza party. Just make sure the reward remains within your budget, of course.

Remember, the key here is motivation. If having a huge, wall-sized chart is what’s going to work for you, draw or order one. If Post-its with your latest savings account balances keeps you plugging away, that’s fine, too. Whatever system works for you is perfect.

Open a High-Interest Savings Account

It’s not enough to budget and stash cash in a regular savings account. In addition to a regular checking and savings, you’ll want to take your money to the bank and deposit it directly into a high-earning savings account. This separate savings account needs to be one you’re unable to touch easily, so you won’t be tempted to spend the money on anything but your new home.

Check with your current bank to see which account will earn you the highest rate. Consider getting a bond for 6, 12, or 24-months if you won’t be able to buy your house in the near future. It’ll keep your money locked down and earning high interest in the process.

Pay close attention to the annual percentage yield (APY), which is indicative of how much interest your money will earn over time. Here are three high-interest savings accounts you can open online:

• VIO Bank High Yield Online Savings Account: This high-earning account has no monthly fees and you can open an account with just $100. The APY is currently 0.51%*. You are able to make up to six free withdrawals per month, though, so you’ll have to be careful.
• Marcus by Goldman Sachs High-Yield Online Savings Account: With an APY of 0.50%*, this online account has no monthly fees and no minimum deposit requirement. Use the handy Savings Interest Calculator to see how much you can save over 1-10 years.
• Citi Accelerate High-Yield Savings: With the same APY as the Marcus account above (0.50%*, but this rate is only in some markets, so double check before signing up), this account also doesn’t require a minimum deposit. However, it does have a monthly fee of either $4 or $10, depending on whether you link a checking account to it, so be sure to read the fine print.

Note: * Rates current as of Aug. 25, 2021.

We also recommend using a savings app. We prefer Qapital, because it rounds your spending up to the nearest dollar, and then automatically moves that money into a savings account.

Just keep in mind that saving apps generally offer lower APYs. They’re fantastic for motivation, but aren’t the best way to maximize your interest earnings.

Use Your Roth Contributions

If you have savings set aside in a Roth IRA account, you can technically use a portion of it toward a first-time home purchase. However, you have to follow, otherwise you could face a hefty penalty.

You can use money from your Roth IRA for a down payment if:

• Your first Roth IRA contribution was made at least five years ago.
• You only need $10,000 (this is the most you can withdraw to use toward a first-time home purchase).
• The withdrawal must be applied to a home purchase within 120 days.
• This is a once-in-a-lifetime option, so use it wisely.
• If you meet all of these criteria, your withdrawal should avoid any taxes or penalties, but definitely confirm this with a tax advisor beforehand.

There are some additional gray areas to consider, such as the definition of “first-home purchase.” Generally, this term applies to anyone who hasn’t purchased a principal residence in the last two years.

So, if you (or your partner) owned and sold a house over two years ago, but haven’t owned anything since, then technically, you’ll be considered a “first-time homeowner” again. Crazy, no?

You can also use Roth IRA funds toward a first-time home purchase for a child, so that’s definitely something to keep in mind for the future.

However, it’s not always the best idea to use your retirement savings to secure your first home. You’ll want to consider many factors, including the mortgage rate, the estimated returns on your retirement account, as well as extra costs, like incurring a high PMI rate. In the end, it might be better to put down less and keep your retirement savings on track.

We suggest you speak with a financial advisor for more clarity before you decide to use your Roth IRA for a home purchase, as everyone’s situation is unique.

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Saving for a down payment on a home might seem downright impossible at the moment. However, if you can stick to a solid budget and regularly sock some cash into a high-earning savings account, you’ll be closing on your dream home in no time.