This is a guest post from Erika at Newlyweds on a Budget. She writes about managing finances, being a newlywed, and frugal living.

I am currently 27 and live in a shack with my husband of a year and a half. We have paid off credit card debt, paid off our car loan, have survived living on one income for four months, and are planning on starting 2012 with a bang to save up for a house down payment.

We hope to own a home in five years. This is our plan.

1. Pay off remaining $2,000 credit card debt.

We paid off our car last month, which brought down our total debt down to a $2,000 credit card, and a little under $20,000 left in student loans. We plan on paying off the card within the first few months of 2012 (which is currently at 0% interest until April 2012). We will continue to tackle the student loans by increasing our payments.

2. Save, save, save

This past year, with both of us working, we were able to save $8,000 in eight months as a back-up/survival fund for when my husband would stop working for four months to enter the fire academy full-time. Now that he is going to start working again at the end of December and we’ve managed to live fine off my income, we hope to save all of his income for as long as possible.

3. Upgrade

When we found out that Eric wouldn’t be working for four months, we downsized from a one-bedroom apartment to a guesthouse/loft in someone’s backyard. It’s not the ideal living space, but it’s managed to save us a ton of money (and probably is the reason we were able to stay afloat these past four months on one income). I think we’ve paid our dues though–and while we would love to continue saving a ton of money, the reality is that our sanity is more important. And so is a nicer place. I’m thinking one with a dishwasher, a bedroom door, and heating that doesn’t come out of a portable heater? Is that too much to ask?

4. Get a raise, contribute toward down payment

Within the next five years, I definitely plan on getting a promotion with a substantial raise at work. We will probably increase our means of living a bit with this new raise, but I also hope we can contribute a good chunk to our down payment. I know my husband expects to be hired as a full-time firefighter within the next five years as well (it’s tough competition for firefighter positions in southern California), and that will increase our income substantially.

5. Still manage to have fun

I want to own our own home. I still plan on living frugally. But I don’t want to forget to have fun, and that includes traveling. I want to travel as much as possible before we have kids. And even though we’ve been married a year and a half and we still haven’t gone on our honeymoon, we will one day. I also want to go to Europe. I want to try and fund our travels through a separate “extra” fund. Meaning, any extra income we earn that doesn’t come from our immediate income, such as mileage reimbursement checks from work, mystery shopping money, blog advertising, and tax returns.

What are your steps to buying a home? Any tips for us?

*Little House says: This is an awesome plan. I really like how you downsized when your income situation changed. I think people can learn from this. Thanks so much for sharing!

This year, my husband and I will be digging in our heels with the idea of fulfilling our home ownership goal. We couldn’t have picked a more opportune time; housing prices have finally come down to more reasonable levels and mortgage rates are quite low, historically in fact. Five years ago during the peak of the market, we thought we wouldn’t be able to afford a home in Southern California for many years, possibly not until we reached our late 40′s or early 50′s. We were fine with that, owning a home wasn’t on our agenda. Paying thousands of dollars a month for a tiny plot of land in a fixer upper just didn’t sound appealing. But, times are a changin’!

The homes in our area are still on tiny plots of land and require a bit of TLC, as many seller descriptions mention. But, the houses are literally two-thirds to half the price they were compared to 2005, and the mortgage rates have remained steady hovering around 5 to 6%. I’m also feeling positive since a few of the homes in our price range, the mid to high $200,000, are pretty cute and may not require as much work as we had originally planned. Here are some of the most recent homes surrounding our neighborhood that on the market, you’ll notice they are small, but quaint:

A cute little house for $225,000

Another little house for $240,000

A slightly bigger home, but not much, for $285,000

Based on these home prices, using the Quicken Loan calculator, our monthly mortgage payment would be between $1,291 to $1,785 including taxes and insurance. That’s anywhere between $15 to $509 LESS than our monthly rent! These figures are based on homes ranging from $225K to $285K with only $15,000 down.

Of course there are many unknown variables such as we may not qualify for the lowest finance rate. We also are working on saving up for our down payment, so predicting that $15,000 down may not be very accurate. Another factor that may change is that by the time we are ready to purchase our house, which will most likely be towards the end of the year, the interest rates may rise. Below is a historical chart showing that interest rates on a 30-year fixed mortgage haven’t been this low in the past 10 years.

Historical Mortgage Rates for the past 10 Years

Obviously, the sooner we can submit offers on homes, the more likely we will be able to lock in a low mortgage rate. Over time, the amount of money that can be saved on finance charges can quickly add up. For instance, below I’ve outlined how much interest will be paid on a home loan of $250,000 at various rates:

• 5% APR: total interest paid over 30 years – $233,139.46
• 6% APR: total interest paid over 30 years – $289,595.47
• 7% APR: total interest paid over 30 years – $348,772.25
• 7.5% APR: total interest paid over 30 years – $379,293.06

Whoa! If we don’t qualify for the 5% loan, we end up paying more in interest over 30 years than the actual cost of the home! Using Bankrate’s amortization chart,  the majority of mortgage payments go towards the interest for the first 17 years of home ownership. This is why it is so important to shop around for the best mortgage rate. These figures also explain why so many people who purchased their homes at the peak of the market are upside down on their loans; not a position I envy.

With careful planning and homework, my goal is to be a responsible home owner by the end of 2010. An obtainable goal if I stick to my 3-step plan!