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Spring Home Buying: How to Save for a Down Payment and How Much to Save

Spring has arrived and with that comes peak home buying season. It’s the busiest time for homebuyers, as people come out of their winter hibernation and start exploring what’s available on the market.

Prices are climbing, inventory is moving quickly

Since spring is such a magnet for interested homebuyers, competition is fierce. Inventory, or the number of homes for sale, has been decreasing for the past few years. According to the Trulia Inventory and Price Watch, inventory nationwide fell by 5.1% over the past year. This trend is reflected in Arizona, which has also seen plummeting inventory levels. Phoenix experienced close to a 9% inventory drop in the second quarter of 2017, according to the Home Buyer’s Institute, while the Tucson Association of Realtors reported inventory shortages in Tucson for all homes under $500,000.

Lower home inventory tends to lead to rising prices and that’s exactly what we’re seeing across Arizona. Home prices in the Phoenix area grew by 6.5% in 2017 after growing by 7% in 2016, according to the Arizona Multiple Listing Service. Furthermore, Tucson home prices saw record-setting increases in 2017, with the median home price reaching $200,000 last June, the first it’s been that high since 2008.

In addition to rising prices, interest rates are slowly creeping up and increasing borrowing costs for homeowners. Last December, the Federal Reserve announced a quarter-point increase on the benchmark interest rate, which is used to calculate home loan rates. While these actions haven’t substantially raised overall costs thus far, further rate increases have the potential to do so.

Why it’s time to build up that down payment

With prices increasing and inventory moving quickly, it’s more important than ever to have your finances in order if you’re looking to buy a home. This means you’ll want to have enough saved up for a down payment in case your ideal home becomes available. Houses in the Phoenix area stay on the market for an average of 75 days, meaning you’ll have a little more than two months to pull the trigger. Homes in Tucson are moving even more quickly, with the average home staying on the market for just 49 days, according to the Multiple Listing Service of Southern Arizona.

The key takeaway here is: If a home is available, you’ll need to move quickly.

It’s also important to get preapproved for a loan so you’ll be ready for any surprise availability. To get preapproved, you don’t need to have your down payment at the ready—just have proof of your income and assets, good credit, employment verification, and other general documentation such as your driver’s license and social security number. You can get preapproved quickly through our website.

How much should you save for a down payment?

The first step toward saving for a down payment is figuring out how much you’ll need. How much you save depends on a few factors that will impact the total amount you’ll pay for your new home.

A common debate concerns whether you should save the minimum 3%-5% necessary to secure a home, or the 20% that ensures you won’t have to pay for Private Mortgage Insurance (PMI), which saves you money in the long run. Your savings goal should reflect the amount of time it takes you to save up money. If it’s going to take you five years to save 20%, then rising housing costs and interest rates may wipe out the savings from foregoing PMI costs.

Specialty home loans may offer lower down payments

There are also several programs that enable you to bypass PMI and put down 5% or even less. Vantage West offers specialty loans for those serving as physicians, law enforcement, teachers, healthcare professionals, and more. These loans do not require PMI with a 5% down payment.

Other federal programs such as Federal Housing Authority (FHA) require down payments as low as 3.5% although you might have to pay Mortgage Insurance Premium (MIP).  VA loans do not require a down payment.  Explore these options to see if you qualify for a specialty loan.

How to save for a down payment

Once you’ve made a decision on the 3%, 5% or 20% question and analyzed your options, you can figure out exactly how much to save. But how do you save it? Here are some easy methods for saving that won’t require you to take on a second job or borrow from others.

1. Automatic Transfers

The problem with money is that it’s so easy to spend when we know we have it. With automatic transfers, your money moves to your savings account before you see it. You can set up your transfers through your direct deposit settings or by setting up an automatic transfer via online banking. To figure out how much you should transfer, take your total savings goal and divide that number by how many months you need to reach your goal. Check out the dividend-bearing savings plans offered by Vantage West to see what works for you.

2. Invest in a short-term CD

Certificates of Deposit (CD) provide higher returns for keeping your money invested for varying periods of time, called terms. Vantage West offers CDs for terms from 6 to 60 months. If you have some time to spare, it would be best to invest in a short-term CD to ensure that you earn the maximum possible returns.

3. Save your tax refunds

Tax time is right around the corner, and for many, that means receiving a refund check. It’s tempting to use that lump sum to take a vacation or buy something nice for yourself. Instead, try to think long term. Let’s say you receive a refund check for $2,000. Putting $2,000 directly into your savings means you’re nearly halfway to a 3% down payment target, and having a sizable chunk of money in your savings will also motivate you to save more.

4. Save rewards points

Many credit cards offer rewards points for qualifying purchases that can be redeemed for cash back. For example, Vantage West offers the Connect Rewards Visa Signature®, which gives you 5 times the rewards points on your choice of category. They also offer a Rewards Checking account, where you can rack up rewards points on each purchase. For a limited time, they are running a promotion that offers 20,000 points (a $200 cash value) when you open a new account. Rather than spend that cash back, send these rebates directly into your savings account. (See promotion details at VantageWest.org/getrewarded).

5. Withdraw from your IRA

Did you know that you can withdraw up to $10,000 from an Individual Retirement Account (IRA) without penalty? That number rises to $20,000 if you’re married. The catch is that you must use the withdrawal to purchase a home. Also, if it’s not a Roth IRA, you’ll still have to pay income tax on the withdrawal (learn more about the differences between a Roth and Traditional IRA here).

Home buying takes patience, concentration, and the willpower to withstand short-term benefits. But with some discipline and a clear end goal, you’ll be able to gather up enough savings to be able to pounce on your ideal home once it becomes available.

We wish you luck on your spring house hunting and hope that you find the right home for you. If you have any questions about the home buying process, contact the Vantage West home loan team. The team makes decisions locally and can guide you through the unique characteristics of the Southern Arizona and Phoenix areas.

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Disclosures

Vantage West Credit Union is Federally Insured by NCUA. All products and services subject to approval and subject to change. Certain restrictions apply. Certificates earn dividends.  Consult your tax advisor about IRA eligibility, contributions, qualifications, and early withdrawal penalties. Equal Opportunity Lender. NMLS #485751

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