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7 Reasons to Save for a House before Applying for a Home Loan

Updated on November 2, 2012
Homes aren't cheap, of course, but smart saving can help you get the best possible home loan.
Homes aren't cheap, of course, but smart saving can help you get the best possible home loan.

Help for Buying A Home

Before you apply for a home loan, you should spend at least several months saving up some money. Many people spend a lot longer than that preparing to get a home loan, saving up large sums of cash before bothering to look at homes. Here are seven key reasons why this is important to do:

1.     You want to have a large down payment so you have less of a loan to repay. The smartest financial move that you can make when buying a home is to take out the smallest loan possible. One key way to do that is to have a large down payment. The more money that you can pay in cash up front, the less money that you need to take out for a loan. The smaller the loan, the easier it will be to pay it back and to do so quickly.

2.     A large down payment can mean less money paid in interest. Because you will be able to take out a smaller loan, you’ll be able to pay less in interest charges on that loan. That means that you’re basically getting your house for a cheaper rate when you save up a large down payment before getting your home.

3.     Saving for a home will teach you important things about your finances. The recent problems with home foreclosures have taught us all that it’s important to be able to afford your home loan. Saving up for a home will teach you important skills related to budgeting and setting aside money. This can be crucial when it comes time to make those home loan payments in the future.

4.     You can use the savings time period to improve your credit score. There are many benefits to improving your credit score before you apply for a home loan. The time during which you are saving up your money for your down payment on your home is time that you can use to make those improvements to your credit score. Learn more.

5.     A down payment of at least 20% prevents higher insurance costs. If you are unable to come up with a down payment that is equal to at least twenty percent of the total loan then you will most likely be required to purchase something called Private Mortgage Insurance. This is insurance that helps reduce the risk to the lender of financing a loan without a large down payment. If you’re required to get this then that’s just more money that you’re shelling out each month. That’s a problem that you can avoid if you save up for a house before getting your home loan.

6.     A larger down payment means better home equity. The amount of money that you’ve paid off on your home equals home equity. That is the amount of cash money that your home is worth to you. If you need to take out a home equity loan later, you will be able to get that amount. The higher your down payment is now, the more home equity you have immediately upon getting your new home.

7.     Savings accrues interest. As you are saving up for your home, you can be putting that money into an account that earns interest. This is a really smart way to make your money work for you!

Thoughts on Buying vs Renting a Home

Comments

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  • amybradley77 profile image

    amybradley77 

    7 years ago

    This is very good advise, also something I plan to start doing very soon. So, thanks for the extra helping tips here, great page. A.B.

  • ocbill profile image

    ocbill 

    7 years ago from hopefully somewhere peaceful and nice

    Great recommendations. I agree a larger down payment of 20% or more, should be the norm for conventional loans. That is what it is in Canada (and they avoided the housing crisis) and mostly worldwide.

  • Hello, hello, profile image

    Hello, hello, 

    7 years ago from London, UK

    Brillintly written hub which willhelp to achieve the goal.

  • azurahalla profile image

    azurahalla 

    7 years ago

    Great advice,I especially enjoyed the point you made on improving your credit score. Thanks

  • biancapaloma profile image

    biancapaloma 

    7 years ago

    Good useful sound advice - thanks!

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