Mortgage Rates Keep Dropping: 15 Steps To Take Now So You Can Afford Your Dream Home

Whether you're buying your first home or your fifth, putting more money down upfront can reduce your monthly mortgage payment, lower total interest charges, and potentially secure a better interest rate — all smart money moves for homeowners.

With mortgage rates dropping to their lowest levels in 16 months, now might be an ideal time to make your move. According to the Mortgage Bankers Association, the average rate on a 30-year fixed-rate mortgage fell to 6.44% in late August, the lowest since April 2023 and down from a peak of 7.9% last October. This decline, driven by signals from the Federal Reserve to lower borrowing costs, has encouraged refinancing and new purchase applications.

If you currently own a home, leveraging the equity you've gained may help. However, first-time buyers will need to find other ways to gather the necessary funds. Here are some strategic steps to set more money aside for your home purchase.

Before you start taking any other steps, it's critical to calculate how much you'll need to put down. Get prequalified for a mortgage loan to find out how much you qualify for, and also consider your budget to determine what you can afford to pay each month.

With this information, you'll be able to get a basic idea of what you can afford in terms of sales price, then calculate your minimum down payment based on that figure.

For example, if you're buying a $200,000 home and getting a Federal Housing Administration (FHA) loan, which requires a down payment of 3.5% or more, you'll need to save at least $7,000 in addition to your closing costs. If you want the same home but with a conventional loan, you may be able to get by with a $6,000 down payment (3% of the total).

Most conventional loans require you to put down at least 3% of the home's purchase price — and that's in addition to closing costs. Just keep in mind that some lenders may require a higher down payment, especially if you have a larger loan or your credit history is less than stellar. Speak with a mortgage lender before you start saving to make sure you choose the right target.

There are many different ways to save for a down payment, but it's important to focus on the ones that work best for you. Some may have more room in their budget for regular saving than others, and you might have more or less time than your peers for extra money-making endeavors.

Regardless of how you plan to save, write it out from the beginning so you can be more effective with your efforts. It's also important to communicate about your strategy with a spouse or partner who's purchasing the home with you.

If you've had a subscription or membership for a long time, it can be difficult to drop it, even if you don't use it regularly. However, permanently cutting one or more recurring charges from your budget will allow you to redirect that cash flow toward your down payment fund.

If you're not sure where to start, an app like Truebill can help. The service will cancel subscriptions you no longer use and can even help you negotiate lower rates on cable, phone, and internet bills.

Paying off high-interest debt like credit cards is another way to free up some cash flow in your budget and also helps improve your credit. Depending on how much high-interest debt you have, there are a few different ways you can approach it.

For example, if you have good credit but are struggling with high-interest credit card debt, the best balance transfer cards could help you pay down your balances interest-free. These cards typically give you an introductory 0% APR promotion for a period — sometimes 18 months or longer — during which you can transfer and pay off what you owe.

If you can't qualify for a new credit card, or you simply want to avoid taking on new credit shortly before applying for a loan, you could employ the debt snowball or debt avalanche method to accomplish your goal.

If you're a first-time homebuyer and your income is relatively low, you may be able to get help with your down payment through an assistance program. These programs are offered through nonprofit organizations and state or local government agencies.

Depending on the program, the assistance may come in the form of a grant — which you don't have to repay — or a loan. Here are a few ways that loan could be structured:

• You make payments in addition to your mortgage loan, just like a traditional loan.
• You don't have to repay the loan until you move, sell, or refinance your mortgage.
• The loan proceeds are forgiven over a set number of years as long as you don't move, sell, or refinance.

To qualify for one of these programs, you must typically be a first-time homebuyer with low-to-moderate income. You'll also likely need to use the home as your primary residence — investment properties usually don't qualify — and your property must meet certain eligibility requirements as well.

Run an internet search for down payment assistance programs in your area to get an idea of what's available.

With some loan programs, you don't need to put any money down. For example, Veterans Affairs loans and Department of Agriculture loans offer up to 100% financing. Also, some lenders may offer no-down-payment conventional loans to select first-time homebuyers.

If you're wondering how to get a loan with no down payment requirement, check with lenders in your area. You may also consider working with a mortgage broker, who might have a good idea which lenders offer such loan programs.

Remember that having no down payment could increase your chances of being underwater on your loan if your home's value decreases.

It's not easy giving up the things you enjoy, but cutting back on your lifestyle for a short period could pay off once you can get into the house you want. 

Before I bought my first house, I moved in with my parents for a few months to add a few thousand dollars more to my down payment fund. It was a challenging experience for all of us, but it made a big difference.

If moving in with family isn't possible, look for other ways to downsize your lifestyle. Look at your budget and spending to see if there are some opportunities, such as cutting back on eating out, entertainment, or travel.

If you can make it work, it may be worth it to take on a second part- or even full-time job to save more for your down payment. Even if you're working just a handful of hours a week, that could be hundreds of dollars a month you can save.

Unfortunately, taking on a second job may not be the best option for everyone. Consider all your options to determine whether this is a good fit for you. If not, you could consider asking your current employer for more hours or for a raise.

We all have personal belongings that we bought several years (or even a few months) ago that we likely won't use again. If this describes anything in your current home, it might be a good time to start selling some of those items.

Unfortunately, you likely won't get nearly as much for these items as you paid. But depending on how much you have, you could earn hundreds of dollars. It'll also make it easier to downsize your lifestyle when you have less clutter around your home.

If you have time for a second job but not a lot of flexibility in your daily routine, apps like DoorDash, Postmates and Instacart allow you to act as a delivery driver for takeout and groceries based on your schedule.

To do this, you'll need your own car, and you may also need specialized insurance to make sure you're covered. You'll also need to pay for your own gas, which eats into the income potential.

That said, it's worth a try, especially if schedule flexibility is important to you.

It's not uncommon to get the advice to rent out a room in your home to make extra money, but what about your car? Services like Getaround and Turo allow you to earn money without leaving your home.

These apps connect people who have vehicles they aren't using and people who need to rent a car by the day or even the hour. As long as you have stretches of time when you don't anticipate needing your vehicle, you could rent it out and put that extra cash toward your down payment fund.

If you have some particular skills that you could turn into a side hustle, now is an excellent time to start. For example, if you're a skilled writer, graphic designer, web developer, or virtual assistant, you could leverage your talents and expertise to make money doing something you enjoy.

The caveat is that it can take time to start making money with these options, even if you're really good at what you do. But the sooner you get set up, the easier it will be to continue to earn income long after you've closed on your mortgage loan.

One of the best things you can do is to treat your savings like another monthly bill. Instead of relying on whatever is leftover at the end of the month, set up automatic transfers to your savings account. That way, you can ensure you're saving enough every month.

You can also potentially enlist the help of an app like Digit. The service connects to your bank accounts and reviews your income and spending. Based on what it finds, it will automatically transfer money from your checking account to an account with Digit, which makes it a little easier to rack up savings if you're having a hard time doing so on your own.

Most people can't count on a large inheritance, but there are other windfalls that can occur throughout the year, which you can use to put toward a down payment.

For example, if you receive a tax refund or earn performance bonuses at work, consider adding that cash to your down payment savings instead of spending it.

Many of the best mortgage lenders allow you to use money gifted or loaned from relatives to fund your down payment. Keep in mind that if an individual gifts you more than $15,000, they'll need to disclose it to the IRS, and it could impact them through the tax code's gift tax.

Also, you may need to disclose the source of your funds to the lender, and if it's a loan instead of a gift, you'll want to spell out the repayment terms before you receive the money.

Coming up with a down payment for a house might seem like a huge obstacle, but there are several options out there that can help you achieve your savings goals. Start by figuring out exactly how much money you'll need, and then take on a savings strategy (or multiple strategies) that work best for you.