Save for your Dream Condo in 5 Years With These Tips

For many people, opening a great condo would be a dream come true. But planning for a purchase of that size can be daunting. Whether you plan on paying for the condo entirely in cash or covering a down payment and securing a mortgage, you usually need quite a bit of money to pull it off. Luckily, by using the right approach, you can gather the necessary funds. If you want to save for your dream condo in five years, here’s how to go about it.

Estimate the Future Cost of Your Dream Condo

While it may seem like you can use the current cost of the condo to estimate your savings needs, that usually isn’t a smart move. The housing market can shift with surprising speed, causing the value of properties in your area to change dramatically over the course of several years.

Ideally, you want to do some research before you create a savings plan. See how condo prices have changed over the past several years and average the annual change rate. That way, you can estimate the future cost of buying your ideal condo, allowing you to create a savings strategy based on the price you may see when it is time to actually buy.

However, you also need to make sure you factor in other related expenses. Mortgage closing costs – which are something you won’t have to worry about if you’re paying cash – are often overlooked by first-time homebuyers, leaving them a bit short if they need to cover them. In most cases, closing costs run 2 to 5 percent of the loan principal amount, though that can vary depending on where you live and how you complete the purchase.

Whether you’re a cash buyer or not, you also need to have money for inspections and appraisals. The average inspection runs $338, while an appraisal averages at $340. However, depending on where you live, it could be higher or lower.

While cash buyers technically don’t have to get either of those, they can be wise investments. They help you learn more about the property’s condition and market value, ensuring you’re getting a reasonable deal on the condo.

If you’re getting a mortgage, paying for appraisals and inspections is often unavoidable. Most lenders require these kinds of checks, as they are effectively the owners of the property until you repay what you borrowed.

By factoring in these extra costs, you can ensure you have enough in savings to complete the entire buying process. Otherwise, you may find yourself short.

Know How You Want to Make the Condo Purchase

Whether you plan on buying a condo in cash or securing a mortgage plays a big role in how much you’ll have to save. With the former, you need to gather up all of the money you’ll need for the purchase. With the latter, you only need to cover the down payment.

However, if you’re going the mortgage route, you also need to determine the size of that down payment. Different mortgage programs have different requirements.

For example, a conventional mortgage usually requires a 20 percent down payment, though there are a few exceptions to that rule. For an FHA loan, it may allow down payments as low as 3.5 percent. VA loans have options that don’t make a down payment necessary at all. The same goes for USDA loans.

If you aren’t sure how you want to make your condo purchase, you may have trouble determining how much you’ll need for a down payment. While you can always set aside more than the minimum, a move that helps you come out ahead financially in many cases, you can’t come up short of the requirement.

Make sure you research your mortgage options in advance. That way, you can identify your target.

Determine How Much You Need to Set Aside Each Month

Once you know what the condo will approximately cost, the down payment requirements, and the various other expenses you’ll need to shoulder, you can determine how much you need to set aside every month to save for your dream condo in five years. Total up all of the costs and then divide that amount by 60 (the number of months in five years).

For example, let’s say you’re going the cash route. If the property purchase price is $150,000, and you want to get an inspection and appraisal, suggesting the price for those is average, you’ll need $150,678 in the bank. Divide that by 60 months, and you’ll have to stash $2,511.30 a month to gather the funds.

If you’re getting a conventional mortgage and need a 20 percent down payment, your down payment on a $150,000 condo will be $30,000. Add in the 3 percent in closing costs and the inspection and appraisal, and that brings the total to $34,278. Divide that by 60 months, and you get $571.30 that you’ll need to set aside monthly.

Now, those numbers don’t factor in earning any interest on your savings. If you have a high-yield savings account, you may be able to set aside less each month and still hit your goal. The same goes for investing the money, though that approach does come at the risk of experiencing losses and not just gains.

If you want to factor in potential interest and earnings, you certainly can go that route. However, you can also rely on the basic number without that included in the equation.

Stick to Your Savings Strategy

Once you know how much you have to set aside, you need to commit to saving that amount every month. Add it as a line item in your budget and choose to make it a priority. Consistency really is the key, as skipping a deposit here or there prevents saving from becoming a habit.

Just make sure you also keep up with your other obligations. After all, your credit score can matter, too, especially if you’re getting a mortgage. Aim to get that as high as you can. That way, you can achieve your goal of saving for your dream condo in just five years.

Can you think of any other tips that can help someone save for their dream condo in five years? Share your thoughts in the comments below.

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started. Check out these helpful tools to help you save more. For investing advice, visit The Motley Fool.

Tamila McDonald

Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.