In October 2022, the yield on a 10-year U.S. Treasury note jumped to 3.98%, and it is expected to increase to 4.73% by June of next year. That has sent mortgage rates skyrocketing to a 20-year high at the same time housing prices are up. For Americans looking to buy a house, it all adds up to needing a sizable down payment if they hope to manage affordable financing.

According to the Zillow Home Value Index, the standard home value in the United States is $357,000. To get a reasonable interest rate and avoid paying private mortgage insurance, future homebuyers will want to have 20% set aside for a down payment — or nearly $72,000.

Besides the initial amount, they must remember buying a house involves closing and first-year maintenance costs, and a financial commitment over many years.

For young families, saving for a home down payment takes some organization and discipline.

CREATE A GOAL

If buying a home is your goal, then saving for the future is a must. Most young families probably do not have $75,000 sitting around for a 20% down payment and the additional costs of buying a starter home.

To save $75,000 over five years for a home down payment, you will need to put away $15,000 per year or $1,250 per month. That is an intimidating amount for some and seemingly out of reach. Add another year or two, and the amount drops — $12,500 annually or $1,041.67 monthly, a more accessible value.

There are other options. A family can lower their objective down payment to 5% or 10% of the potential house price. Some lenders require only a 3% down payment, but the trade-off is higher interest rates. Also, remember that a lower down payment will require a PMI payment.

If you are a veteran or a service member, with sufficient time in, you can often get a VA Home Loan, which does not ask for a down payment.

AUTOMATE YOUR SAVINGS

Warren Buffett said, “Do not save what is left after spending, but spend what is left after saving.” His quote is another way of saying “pay yourself first,” a phrase espoused by financial advisors when discussing retirement

plans, but the same concept is valid for a home down payment.

Use a separate savings account to save 8.33% of your monthly annual objective. Alternatively, if you are paid every other week, put aside half that value or 4.17% of your weekly net pay into a savings account.

The concept is simple. Establish an automatic transfer to an independent savings account after each pay period. Young families who live frugally will probably not miss the money, assuming they have enough for their daily expenses.

TAX REFUNDS AND RAISES ARE A BONUS

One way to reach a home down payment savings goal faster is to leverage tax refunds or raises. Most people do not include this money in their monthly budgets. Some use it for bigticket purchases or vacations. If owning a home is important to you, put that money aside towards your down payment.

The Internal Revenue Service reports the average tax refund was $3,039 in 2021. Assuming a family receives the same sum annually over five years, they collect $15,195 over that period. A $75,000 goal is more attainable now, as the annual amount drops to $11,961 per year or $996.75 per month of required savings.

Likewise, raises can be used to accelerate your savings rate and reach the goal earlier. You are already used to living on your current salary. If you can manage it, take your increase, say 2%, and apply it all to saving for your future home. Increasing your saving rate by 2% means the $1,250 per month in year one becomes $1,275 in year two. Your monthly savings rate becomes $1,380.10 or $16,561.21 annually in year five, assuming a 2% yearly raise.

CUT YOUR MONTHLY EXPENSES

If you can manage it, lower your expenses, increasing the difference between income and costs each month.

Review every budget item and decide if it is really needed or not. A family could potentially save tens to hundreds of dollars per month. It does not sound like much, but cutting $10 off a monthly bill, like cable or eliminating Netflix, saves an extra $120 annually.

Ask yourself about the cost and necessity of streaming services, cable, breakfast, coffee, lunch, cell phone plans, insurance, travel and restaurants. Depending on your habits, squeezing expenses out of these categories tends to be easier.

Indeed, eating out is more expensive than making your own dinner or bringing lunch to work. The typical American spends $2,375 on eating out and takeout each year. Reduce that amount by 10%, and you are adding $237.50 to the annual savings goal.

In another example, the average vacation costs roughly $3,838 per week for two people, and not taking a vacation for one year significantly increases your savings.

LIVE WITH YOUR PARENTS

Another option is to move back home, which can save a lot of money. In the United States, the average monthly rent is around $1,751. Combine that with savings on electricity, gas, water, etc., and it adds up to at least $2,000 a month. Saving an additional $24,000 per year beyond your target of $15,000 means the $75,000 goal is achieved in a little more than two years.

BE DISCIPLINED IN SAVING

Saving for a home down payment requires discipline and planning because it takes a few years. Besides your savings rate, other variables influencing how quickly you reach your goal are income, including the price of a home and the plan’s dollar value.

First-time home buyers should know that the initial outlay for a home is usually more than expected, so save a little more than needed. ■