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How to Save for a House While Renting
Saving for a house is a big task, especially if you’ve already got other bills and rent to manage. But it’s never too late to start putting money aside for future home-ownership. If you’re renting and have always wanted to have a home of your own, check out these tips on saving for a down payment while renting and watch your dreams come to life.
Simple Money-saving Tips for Renters
There are a lot of easy ways to trim expenses and point more money every month towards saving for a starter home. From selling and purging things you don’t need any more to building a realistic budget, we’ve got some great ideas to help you round up the funds for a down payment. With a little focus and discipline, the home you’ve always wanted can be within reach. Take a look at these tips that can improve your ability to save.
Get a roommate
One of the easiest ways to cut your rent in half and save some big bucks is by finding a roommate. Think half the rent cost and half the utility bills. That adds up to some serious savings that you can apply toward your down payment. Check out these tips for living with a roommate.
Pay off your credit card debt
This one might seem counter-intuitive — after all, you’re trying to save money for a that dream home, right? It’s important to remember that your credit score and debt-to-income ratio are key factors that lenders consider as they’re qualifying you for a loan. When it comes time to shop for real estate and get a mortgage, you’ll be glad you tackled that outstanding debt ahead of time. You may be able to score a lower interest rate!
Rent to own
This is an option for those who are interested in a property but still need to save up cash for a down payment or build their credit score over time. When you’re in a rent-to-own agreement, you typically pay a one-time, non-refundable fee called “option money,” which gives you the opportunity to purchase the house in the future. Usually this price ranges from 2 to 7 percent of the purchase price — which you and the seller will agree upon.
You can pay rent for the property for a specific amount of time (typically 1 to 3 years), after which you have the option to purchase the property from the seller. One big benefit: you’ll be getting the property you want while still being able to save and build your FICO score. And a percentage of your rent may also be credited to the purchase depending on what the seller agreement. First-time homebuyers can really benefit with this type of arrangement.
For example, let’s say your rent is $1,300 a month and you and the owner agree that 20 percent of that will be credited to the purchase price of the property. Since your lease agreement is three years, $9,360 will go towards the purchase:
- Rent: $1,300 x 0.20 = $260
- $260 x 36 months = $9,360
- $9,630 in a non-refundable down payment after just 3 years. That’s a good chunk of change!
Keep in mind, if you decide not to purchase the property, that option money you’ve paid will not be reimbursed.
Now that you’ve set a big financial goal, it’s important to figure out a budget and stick to it. A good rule of thumb to follow is the 50/30/20 rule, where you allocate a portion of your paycheck into three categories:
- 50 percent towards essentials, like food and housing
- 30 percent towards lifestyle, like dinner out or other entertainment
- 20 percent towards financial priorities, such as debt, student loans, retirement and savings
Since you have your sights set on a new home, try moving 5 to 10 percent of your lifestyle budget into the savings category. It might be challenging, but you’ll reap the benefits as your savings continue to build.
Ditch the unnecessary
Consider cutting back on extra expenses. Sure, eating out and shopping are fun but it can add up to hundreds, if not thousands of dollars annually. For the time being, try spending less on non-essentials and you might be amazed at how much you’re saving.
Shave a few dollars off your bills with energy efficient lighting. If a nearby café is walking distance away, leave the car at home. These small changes will be worthwhile when you’re turning the key to your new home.
Plan a garage sale
Believe it or not, a garage sale can put some serious cash in your pocket and help you save money for that house while renting. Since you’re a renter, you might not have the space or be allowed to run a garage sale out of your rental, so ask family and friends if they have a garage to spare for a weekend.
If you’re renting a house, check with your landlord that it’s okay to run a garage sale on the property. Not only will you be getting rid of stuff you don’t need, when you finally move in to your hard-earned home — you’ll save time and money with less stuff to move.
Save your tax refund
Sure, it’s nice to get that refund check every tax season. A shopping spree, a new bedroom set, maybe a beach vacation — those are all fun things that you can do with the money. Resist the urge to spend it on the impractical and instead stick it in your savings account for your future home.
Start Saving for a Down Payment Today
And there you have it! Now you know how to save up for a house while renting. While you’re at it, remember to save for closing costs so they don’t catch you off-guard. If you put down 20 percent or more, you may be able to avoid paying private mortgage insurance as well.
Home ownership is possible once you dedicate yourself to this goal. Once you’ve saved up and are ready to cross that threshold, talk to your American Family Insurance agent and check out our homeowner coverages to insure your dream never goes unprotected. In the meantime, learn how renters insurance helps you proactively protect the things you’ve worked so hard for.