It seems like the San Diego real estate market is only breaking records. Every quarter a new story releases claiming that San Diego homes are hitting an all-time high. In fact, earlier this year, the San Diego Union-Tribune reported that San Diego homes hit an average of $525,000, which is – you guessed it – an all-time high. San Diego, like the rest of California, is enduring record real estate price growth due to a surge in demand and weakening supply in the new housing market. For a first-time homebuyer - this can seem like extremely daunting information.

Every year San Diego makes the cut in a variety of best places to live in America lists. US News and World Report gave San Diego the 22nd best spot in the country. While San Diego excelled in the desirability ranking but dropped precipitously in the living comfortably ranking. Living comfortably is defined as the ability to afford a house, the job market, and opportunities for economic mobility. San Diego, again, suffers due to its rocketing real estate prices. For someone interested in purchasing real estate in San Diego, the first step is to save up for the minimum down payment for that dream home.

Saving for a Down Payment

There are plenty of ways to plan for a down payment; it takes time, patience, and commitment to the plan. A down payment is a single lump sum that the lender (your bank) requests the buyer of a piece of property to pay up front before issuing a mortgage to the buyer. The higher the down payment, the lower the monthly rate and the less you might pay over the life of the loan. The average down payment is around 20 percent of the purchase price - but there are a lot of different mortgage opportunities that can get those down even lower.

Calculating the Mortgage Amount

The first step is figuring out how much you can responsibly spend on a house. Usually, your bank will limit your mortgage amount (the amount you can spend on a house) to around 28 percent of your monthly pre-tax income. However, if your income fluctuates (i.e., you work in a seasonal industry), you may want to limit that even further to 20 percent. Moreover, don’t forget to anticipate maintenance, bills, HOA fees, and the other costs associated with a home.

Set a Savings Plan

Once you know how much you can get for a mortgage, you will know your price range for the house you can buy – which tells you how much you will need to save. Think about the plan realistically. For example, if you need to save $100,000 (assuming a home price of $500,000) in San Diego for 20 percent down over five years, you will need to save about $1,670 a month to hit your goal in five years. If you’re like most people, you probably cannot set aside that much a month. However, this gives you an idea of the process you need to save that money for your mortgage down payment.

Accelerating the Process

Luckily, you aren’t limited to using simply a savings account to reach your goal; you can invest your money in stocks. While stocks are riskier than a savings account, if your plan is several years in the making, you can afford the occasional dip in the market. Moreover, you can likely save less money because your money will be earning you returns.

Generally, you will want to invest in a stock index ETF. ETF will diversify your holdings and reduce the risk of loss. You put a regular amount of money into the ETF every month and watch it grow. Additionally, don’t stick all of your money in stocks – limit yourself to about 25 percent (to shield yourself from severe market changes). The other 75 percent can be invested in a high-yield savings account, money markets, bonds, CDs, and other lower risk investment tools.

The 401(k)

While you cannot withdraw money from your 401(k) for most situations – you can if you are doing it to purchase a house. If you have a well-funded 401(k), you can borrow up to one-half or $50,000 (whichever is less) to put toward your house. You will have to pay the money back within five years (including interest). Luckily, the interest is being paid to yourself, so ultimately, who cares? Pull money from your 401k when you need that extra little bump to get yourself to 20 percent.

However, there are some risks to pulling from your retirement. For instance, if you cannot repay your 401(k), you will have to pay income taxes and penalties (which are severe). Also, if you switch jobs, you are required to repay the 401(k) within 60 days (so make sure your job is stable before you pull from your retirement).

Steele San Diego Homes is a team-driven approach to real estate that works for you. If you are looking to acquire a home in San Diego, we are prepared to help you realize your dreams.