What millennials can teach us about down-payment savings

This generation works hard and gives things up to make their dreams of owning a home come true.

Buying a home is one of the most expensive things we’ll do in our lives, and the down payment is a big reason why. A down payment can cost at least tens of thousands of dollars up front, which is scary for many people who want to buy their own home.

In fact, when it comes to saving up that small fortune, millennials are getting creative. According to Clever Real Estate’s Real Estate Witch’s 2023 Millennial Homebuyer Report, more than one-third of millennials work a second job or a side hustle to make more money. That’s on top of making other sacrifices for a down payment, like putting some of each paycheck aside, spending less, and moving in with family.

What you can learn from how millennials save for a down payment

Millennials who want to buy a home in the next year are doing the following to save up for a down payment:

50% report 45% said they saved a portion of each paycheck; 38% said they cut back on non-essential spending; 32% said they found a second source of income; 24% said they found a higher-paying job; 21% said they moved in with family; 13% said they invested; and 5% said they didn’t pay other bills or went into debt. It can pay off to save and make sacrifices.

Automating a portion of every paycheck is a good way to make saving money a regular habit. You get used to living on a certain amount of money, which already includes money for saving. Budgeting apps like Mint or You Need a Budget (YNAB) can help you keep track of your overall cash flow and figure out how much of each paycheck you should (or can) save.

You can make more money if you spend less while working a second job or looking for a better-paying job, but you might get tired of working so hard. In the same way, moving in with your family will save you a lot of money on rent, but it could make you less independent and less comfortable. Getting enough money for a down payment is mostly a matter of how much you’re willing and able to put towards your goal, just like so many other things in personal finance.

Moving Markets

Putting your savings for a down payment into the stock market and ignoring your bills can backfire.

Investing may seem like a good way to save up for a down payment since annual returns can be much higher than what you would earn in a bank account. But those returns aren’t guaranteed, especially since the average time Americans spend saving for a 20% down payment (less than five years) makes those investments vulnerable to market volatility. People who are about to buy a house shouldn’t invest their down payment money unless they don’t plan to buy a house for a long time.

Another mistake is putting off paying your bills so you can save up for a down payment. This is especially bad when the debt has high interest rates and grows quickly, like credit card debt. Not only that, but not paying your bills on time will hurt your credit score, which is important if you want to get a good mortgage.

How to Save Money for a Future Down Payment

The best place to keep money for a big investment like a house is in an easy-to-access savings account with above-average interest and FDIC insurance.

The best time to save for a down payment is right now. Because the Federal Reserve has raised interest rates, savings accounts now earn a lot more than they did in the past few years. At the time this article was written, some high-yield savings accounts had an APY of 4% or more. That’s more than 12 times the average in the country. With a high-yield account, you can keep adding money to your savings to make them bigger.

Keep in mind that the APY on a savings account is variable, which means it can change at any time. With a CD, people who have already saved a lot of money and want to grow it can lock in the higher rates of today. For example, Ally Bank has a high-yield CD with a fixed APY of 4.25% for terms of 12 months, 18 months, 3 years, or 5 years. Just make sure you don’t need the money before the CD term is over. If you do, you’ll have to pay a fee for taking the money out early.

Since interest rates change a lot these days, people who want to buy a house might also want to think about a bump-up CD. Normal CD savers are locked into a fixed interest rate, but a bump-up CD lets them ask the bank for a higher rate if the bank offers one during the saver’s term (which is likely to happen if the Fed keeps raising rates). Step-up CDs work the same way, with the exception that the bank automatically puts the account holder on the higher rate.

Choices for putting down a small amount of money

A 20% down payment has been the standard for a long time, but you don’t have to save that much. If you only have a small amount of money for a down payment, you are in luck. In fact, some mortgage lenders will accept as little as a 3% down payment.

For example, the DreaMakerSM loan from Chase Bank and the HomeReady loan from Ally Bank both only require a 3% down payment. A 3% down payment on a $600,000 house would cost you $18,000. A 20% down payment on the same house, on the other hand, would set you back $120,000. Just remember that if you put down less than 20%, you may have to pay extra each month for private mortgage insurance or a mortgage insurance premium.

Millennials are taking steps and making sacrifices to make sure their dreams of owning a home come true. It’s never too early to start saving for a down payment, even if you don’t plan to buy a house for a while. Open a savings account or CD with a high yield while rates are high. And if you want to buy a house but don’t have enough money saved for a 20% down payment, look into mortgage lenders that let you put down less than 20%.

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