Do you dream of owning a house someday? If so, you may be wondering how much money you'll need to save before buying one. The total amount, of course, varies greatly from person to person. The following discussion breaks down the many different costs so you can work out the total sum you'll need leaping into the property market.
How Much Money Should I Save Before Buying a House?
There are several ways to purchase a house, but most people either pay the total amount in cash or take out a home loan.
If you don't buy the home outright and plan on a mortgage, the best bet is to save at least 20% of the home's purchase price as a down payment. That amount varies depending on the purchase price of the house. If you are buying a home with a mortgage, consider saving enough money to cover the costs associated with the loan plus an additional 3-5%.
Conventional mortgages typically require a minimum 3% down payment, while a Federal Housing Administration (FHA) loan requires a 3.5% down payment. However, if you have served in the military, you may qualify for a Veterans Affairs (VA) loan, which does not require a down payment.
I recommend saving as much as possible before buying a house. Growing that nest egg can take a long time though unless you cut back on frivolous spending and use coupons on everyday items with online apps like Rakuten.
You must have a sizeable down payment to avoid paying private mortgage insurance (PMI), which averages around 1% of the purchase price. PMI protects the lender against losses if the borrower defaults. To avoid paying the 20% PMI, you need to pay 20% in cash as a down payment on your mortgage.
Here's an added incentive — the larger your down payment, the smaller your future monthly payments will be. You'll also be less likely to get into trouble later because you will have instant equity built up in your property.
The Average Down Payment on a House in America
According to Rocket Mortgage, the average American puts approximately 6% forward as a down payment, far from the preferred 20%. That's only $6,000 for a $100,000 mortgage.
Don't Forget These Additional Costs When Saving To Buy a Home
There are many costs associated with home buying. You'll need to save for more than the down payment. Here are some of the extra costs that may sneak up on you and sideline your monthly budget:
Private Mortgage Insurance
If your credit history is poor or you cannot make a large down payment, this may be mandatory. You'll need to check with your lender to see what options they offer, but you'll likely pay for this unless you can afford to put 20% down in cash. If you borrow more than 80%, you will pay PMI until you build up 20% equity and can refinance.
These fees cover the cost of the closing paperwork for the property. They also include legal fees, title searches, surveys, etc. These closing costs vary by state, so it's best to talk to your real estate agent or lender about how much they charge if they're unwilling to roll these transaction costs into your loan.
Initial Down Payment
The initial money you put toward the purchase. This amount varies depending on the loan type and interest rate. A larger down payment usually results in lower monthly payments.
Homeowners Insurance Premiums
Some loans require mortgage insurance premiums. These may be paid once per month and protect the lender and owner from damage to the property. Plus, it helps reduce risks for other investors or stakeholders, such as the community, Homeowners Association (HOA), and the broader neighborhood.
Property taxes can range anywhere from 0%-10% or even more, based on where you live and the home's assessed value. It's essential to consider these costs when deciding how much to save up before purchasing a home. Often real estate taxes are paid from the escrow account, but this can vary depending on your lender and state.
Homeowner Association Fees
Homes within communities often come with homeowner association fees. These fees go toward maintenance of common areas, landscaping, security, etc. Depending on the size of the community, the number of homes, and other factors, these fees can add up quickly. Often these fees can be paid monthly or quarterly and are not typically rolled into the homeowners' monthly mortgage payment.
A lender charges an appraisal fee whenever they want to verify the property's value. Appraisals are typically done before every purchase to guarantee the property is worth the bank's lending amount.
There are costs to owning a home. In addition to the mortgage, you need to budget for repairs, upkeep, utilities, lawn care, snow removal, etc. Many people don't realize how expensive owning a home can be until moving in. It's important to watch these potential costs and factor them into your monthly housing budget.
When moving, you'll need to make sure you can afford to relocate all your belongings. If you're not doing it yourself, hiring movers can be costly. You may also need to consider renting a storage unit during your transition. Moving costs can add up quickly, so plan ahead.
Decoration and New Furniture
After moving in, you'll want to start decorating and may need to buy new furniture too. Many people spend thousands of dollars on furniture when moving into a new home. But, if you don't have the cash needed and can't get people to give you free stuff, you might have to settle for blow-up furniture for a while.
Starter Home Repair Fund
With a starter home, you'll probably need to fix some things before moving in. That could include leaky pipes, damaged walls, etc. It's essential to budget for these repairs because they could eat away at your emergency fund within the first couple of months after moving in.
You'll want to get a home inspection done before making any final decisions regarding purchasing a home. The inspector will help you identify potential problems affecting the house's value. Additionally, they'll let you know if anything needs to be repaired or replaced.
On a Low Income? Tips on How To Save for a House
Saving money for a down payment is one of the biggest challenges when buying a home. The best way to save up for a down payment is to start saving early and stop spending money. If you want to buy a house, you should put 10% of your monthly salary into a savings account and stay consistent with your savings plan.
That amount may seem small, but it adds up quickly!
Some strategies to save up money for a down payment include :
1. Make extra payments on your credit card
Paying down credit card debt frees up extra cash by reducing or eliminating minimum monthly credit card payments.
2. Pay off high-interest debts first
High-interest debt will continue to snowball until you are stuck in a bad financial position and unable to make ends meet.
3. Start a side business
A side hustle done in your spare time can quickly help you build up your savings. Starting a side business is a great way to make money from home without working for someone else.
4. Sell unwanted items online
We all have closets full of junk we no longer need. As the saying goes, “one man's trash is another man's treasure.” So start selling everything you no longer use if you need some quick funds.
5. Take advantage of tax deductions
If you are getting a tax refund this year, fight the urge to spend the refund! Instead, tuck it away for a future down payment.
6. Consider selling assets such as cars, boats, or real estate
If you have extra toys or vehicles around the home, sell anything you no longer need if buying a home is your priority.
7. Look for a roommate
Depending on where you live, adding a roommate may be a great way to save up extra cash in a few short months.
8. Pay off your student loan debt
If paying off your student debt is within reach, get rid of that burden and then move the freed-up money toward saving up for a house.
9. Avoid expensive restaurants
While some people think you should stop spending at restaurants entirely, it's important to still enjoy life by treating yourself once in a while. As long as these special occasions don't push you further into debt, eating at a cheap restaurant once in a while is not the end of the world.
Wrapping It Up
Buying a home isn't cheap, but it doesn't have to break the bank either. By planning and saving up as much as possible, you can avoid spending unnecessary money down the road. In addition, saving up a sizeable down payment will allow you to purchase a home without debt. And by doing this, you can enjoy the benefits of homeownership for years to come.
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