Saving for a down payment for a house can take years of commitment and budgeting. Down payments rise as home prices rise, making the path to homeownership increasingly challenging.
Financial expert Dave Ramsey breaks down how to effectively save for a down payment and offers an unconventional approach to building a down payment nest egg quickly.
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Though first-time home buyers typically put down less than the typical 20%, saving tens of thousands of dollars can still be difficult while paying recurring expenses like rent and student loans.
Working toward such an important long-term financial goal can feel daunting, but there are small ways to save that add up over time.
Ramsey explains further below.
A couple celebrates the purchase of a new house. With home prices on the rise, down payments growing, making homeownership increasingly expensive for first-time buyers.
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Dave Ramsey explains small budget changes can have a major long-term payoff
Housing prices are increasing annually, exacerbated by years of sticky inflation. As home values grow, the down payments and monthly mortgage payments rise.
Balancing competing financial obligations with the rising cost of living can make building significant savings challenging and keep buyers out of the housing market. More than half of potential home buyers note that saving up for a down payment and closing costs is a significant barrier to homeownership.
However, calculating how much you’ll need to save for a home will depend on the monthly mortgage payment, which should never exceed 25% of your monthly income.
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Once your budget is defined, you can set small actionable steps that will get you toward your savings goal.
“Like with any task that seems impossible, try breaking down saving for a house into smaller steps,” Ramsey wrote. “For example, saving a $40,000 down payment might feel impossible until you break it down into smaller monthly goals. If you pushed yourself to save $1,700 each month for 24 months, you’d hit that $40,000 goal.”
Identifying how much you can realistically save per month will inform how long it’ll take you to reach your down payment target.
Dave Ramsey says a quick pause in retirement contributions can help build a down payment
If you’re hoping to save for a down payment quickly, Ramsey suggests a bold but effective way to supplement your down payment savings.
Most financial experts suggest you shouldn’t pause your retirement savings at the risk of losing out on compounded interest. However, Ramsey suggests a brief pause is alright, as long as 401(k) contributions resume immediately after the home is purchased.
Related: Dave Ramsey warns retired Americans to avoid one mortgage mistake
“But if you’re planning to buy a house in the near future, it’s okay to hold off on your retirement savings and put that money toward your down payment,” he continued. “Just make sure this is only a quick detour (like a year or two)—not a five-year pause.”
Buyers who put aside $500 per month into a 401(k) or IRA could divert that money toward a down payment and add $12,000 to their nest egg in two years. However, it’s important not to dip into your current retirement account to cover the down payment, as you risk losing significant account funds.
“Don’t borrow from or cash out your retirement accounts to speed up your down payment savings,” Ramsey explained. “Not only will you get hit with taxes and early withdrawal penalties, but you’ll also tank the long-term growth of your retirement savings—costing you hundreds of thousands of dollars at retirement. Yikes.”
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