6 Ways to Help Renters Reach Their Down Payment Goal Faster
According to Trulia's February Rent Vs. Buy Report, it's still cheaper to buy a home than rent in all 100 of the country's largest metropolitan areas. In Detroit, for example, it's 66 percent cheaper to buy than rent.
But while mortgage loan rates are still relatively low compared to the period before the recession -- or, frankly, almost any time in U.S. history -- it's hard to save money for a down payment while paying rent to keep a roof over your head. (America's median monthly rent is $756.) So how can renters -- including many of the 4 million people who suffered through full foreclosures in recent years -- acquire that down payment?
Saving up a standard 20 percent down payment for your next home will likely require extreme effort. You'll need $42,000 for the down payment for the average $212,000 U.S. home. Here are some ideas:
1. Cut the Cost of Where You Rent
To alleviate finances each month, consider a smaller or cheaper apartment. You could go a step further by getting a roommate, which would cut your rent by half, saving you hundreds of dollars each month that you could target toward your down payment. Go even further by moving in with your parents or other relatives for reduced or free -- depending on your family dynamics -- housing.
2. Get a Deal from a Bank
Some banks' programs for first-time home buyers allow you to make a much smaller down payment than the standard 20 percent. "Banks need to -- and are -- playing a role in providing sustainable homeownership by working with housing groups and agencies about opportunities that are available," said Malcolm Hollensteiner, director of retail lending at TD Bank (TD).
TD Bank's Right Step mortgage program provides qualified buyers with financing of up to 97 percent of the purchase price, without the private mortgage insurance requirement that traditional FHA mortgage loans have. But the biggest draw is a low 3 percent down payment option.
3. Get Help from Your State
Some states offer home buying assistance programs to residents whose incomes qualify. The New Jersey Housing and Mortgage Finance Agency, for example, assists first-time homebuyers with a low, fixed-rate mortgage and down payment or closing cost assistance. Such state programs may have limits beyond income. The U.S. Department of Housing and Urban Development has a directory of state programs.
4. Cut Extra Expenses
Advancing toward your goal of owning a home might require cutting corners on everyday purchases, too. (DailyFinance articles regularly offer ideas for household budget trimming.)
Anytime I shop online, for example, I always search for coupon codes in advance. By spending two minutes looking for a discount code, I saved over $50 on my last online purchase. Whether you downgrade your car or your cable, there are a host of practical ways to dedicate more of your income to building up your down payment.
5. Lower Your Debt
"Saving a down payment has always been one of the primary challenges for home ownership, especially with millennials who have student loans and consumer debt," said Hollensteiner.
Those who carry consumer debt, such as balances on their credit cards, can reduce the amount spent on high interest rates by consolidating and transferring that debt onto a zero-interest credit card. However, there are a couple caveats to this approach.
Always make sure you consider how much money you'd truly save by taking advantage of a credit card promotion. Zero-percent credit card offers that encourage you to transfer existing balances may require a transfer fee, based on a percentage of your total balance. Furthermore, always be aware of when promotional zero-percent interest rate offers expire and determine what your standard interest rate will be beyond the limited time offer.
6. Consider Private Mortgage Insurance
Home buyers who don't meet low-income requirements for special mortgage programs and don't have the 20 percent down payment can get private mortgage insurance. Lenders use PMI to protect themselves if borrowers default on their mortgage loan payments.
PMI is based on the loan amount and the size of the down payment provided. Typically, the PMI rate ranges between 0.5 to 1.15 percent of the loan -- a considerable expense each month. The estimated PMI cost for a $212,000 home with a $20,000 down payment, for example, would eat up about $93 monthly ($1,116 per year) from a borrower's budget. Opting to pay a PMI premium is an alternative to fronting a standard 20 percent down payment; however, it's important to remember that the lenders are the sole beneficiary of this added expense, and buyers ultimately pay more for their home purchase.