Learn How to Save for a House While Renting
Learning how to save for a house while renting can put you in a better position when it's time to buy.
Contributing Writer at Tally
December 22, 2021
Are you renting a house or an apartment but wishing deep down you were a homeowner? Perhaps you don't have enough saved for a down payment or need to improve your credit score before applying for a mortgage. Maybe you’re waiting for the real estate market to break or for the lease to expire.
Whatever the case may be, when the day comes for you to make your home purchase, you'll want to make sure you're prepared. One way to do so is to save money so that you can pay for things like the down payment, closing costs and new furnishings.
Believe it or not, you can save money while making monthly rent payments. In this article, we'll teach you everything you need to know about how to save for a house while renting. We cover why it's important to have extra cash on hand and five actionable steps that you can take to get there.
Why it's important to have cash on hand for your home purchase
While it's possible to buy a new home without much cash on hand, it can make the process more difficult. The exact amount you need will depend on everything from the market to the house you’re looking for. Below are a few of the reasons why you'll want to have cash on hand when it comes time to purchase your home.
The down payment
You'll want to aim to put at least 20% of the purchase price toward a down payment. So, if you buy a $200,000 home, you would put $40,000 down in cash and finance the remaining $160,000 using a home loan, otherwise known as a mortgage.
If you can't put down at least 20%, you‘re going to pay private mortgage insurance (PMI) until you've paid off at least 20% equity in your home.
Let's say that you put down 10% or $20,000 on a $200,000 home. You'll have PMI on your home until you've paid off 20% of your home's equity.
Mortgage lenders determine PMI rates. If you have PMI you may need to pay a monthly premium, or an upfront premium due at closing or both.
Additionally, those who can put 20% toward a down payment tend to secure a lower interest rate from their lender. So you’ll not only save money by avoiding PMI premium, but you may save in the long run on interest as well. In other words, the more you pay upfront, the more you will reduce your monthly mortgage payments in the future.
Closing costs is a broad term that refers to all fees associated with buying a home. They can include:
Appraisals of the home's value
Loan origination fees
Real estate agent fees
Though it varies, the average closing costs can range between 2% and 5% of the home's value. Based on the example above, you may need to have as much as $10,000 set aside for closing costs, which are due before you can move into your home.
You can also expect to incur costs during and after moving. For instance, you may have moving costs, like a moving company. You may also need to pay to furnish the home, especially if you were previously a renter. This isn’t quite a necessity, but it's worth keeping in mind.
Furthermore, you may also need to pay your cable bill immediately to have television and internet in your home.
Lastly, depending on where you live, you may owe property taxes shortly after moving into your home. Your realtor can help you better understand if this is the case.
How much you need to have saved for these additional costs will vary based on your personal situation.
How to save for a house while renting — 5 tips
If you make monthly rent payments, you may be wondering how you’re supposed to set money aside in a savings account to help you reach your goal of becoming a first-time homebuyer. These five tips can help you put away extra money, reach your savings goals and achieve homeownership.
Here's how to save for a house while renting.
Organize your household finances and set a budget
If you have monthly rent payments, your household finances and living expenses may be tight. You may have other obligations too, like auto loan payments or car insurance.
Start by evaluating your household finances. This includes the money brought into your home and your family's expenses. These are the general household costs needed to live your day-to-day life. Things like groceries and daycare are a part of these expenses, and it doesn’t include optional or discretionary spending, such as eating out at a restaurant.
Once you understand your household finances, set a budget and try to stick to it. You should make your homeownership savings a part of these necessary expenses. For instance, you can commit to saving $400 per month for your new home and make these savings a necessity rather than optional.
Evaluate your spending habits and cut unnecessary expenses
Suppose you set a budget and find that there isn't any money available for your homeownership savings. In that case, you may need to evaluate your spending habits and cut unnecessary expenses.
Do you need your gym membership, or can you work out from home? Do you need both Netflix and Hulu? Cutting down on discretionary spending can help free up cash for your down payment savings and is essential to hitting your financial goals.
Pay down debt
If you have debt, you may want to prioritize paying this off to help ensure that you have enough money for your dream home. When you have debt, you must make interest payments as a cost of borrowing money. The sooner you can pay off your balance and get out from underneath those monthly payments, the sooner you’ll free up cash that you can put into savings.
There are a few options to help you pay off debt. You can refinance the debt by using something like a personal loan. If you have credit card debt, you can consider using a payoff app like Tally†.
Additionally, paying down debt can potentially improve your credit score and help you secure a better interest rate on your mortgage loan. Lenders save the best mortgage rates for those with excellent credit.
Pick up a side hustle
Another way you can boost cash flow for savings is by picking up a side gig. This is a job that you work in addition to your regular job.
Picking up one of these side hustles puts more income in your pocket that you can use to pay down debt or boost savings. Even if you only make an extra $50 per week, you'll end up saving more than $2,500 per year.
Save your tax refund
Come tax season, you may receive a refund and be tempted to spend it. However, using your tax refund wisely can help you reach your savings goals.
For example, you can use your tax refund to get ahead with debt payments, such as those associated with credit cards or student loans. This can free up monthly cash flow while also improving your credit history.
You can also put the money from your tax refund directly into your down payment fund.
Learning how to save money for a house can put you in a position for success
If you’re currently renting, you may be wondering how to save money for a house. Putting aside enough money for a home may seem like a tall task. However, it's easier than you think.
Start by having an idea of your target home price range to understand how much you need to have saved. Consider things like your down payment, closing costs and other costs associated with the move.
Then, take a hard look at your living expenses and work to put money aside. With a bit of patience and discipline, you could be well on your way toward saving enough money for your first home.
One of the biggest roadblocks, however, is debt. If you are looking for help paying off your high-interest credit card debt, be sure to check out Tally. Tally helps you pay down credit card debt quickly and efficiently, potentially freeing up cash and allowing you to reach your homeownership goals.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.