Are you planning to buy a new home? Do you know how much in savings you should have before purchasing a brand new home? Are you aware of the undisclosed costs involved in buying a new house? If no, this article is meant for you. Besides the actual price, there are many hidden expenses involved in purchasing a home that is easy to overlook until the final day.
If you want to buy a decent home that won’t disappoint for the rest of your stay there, keep reading to determine the amount you need to save for streamlining your home-buying process and not sending yourself into a financial spiral.
Becoming a homeowner is a vast financial obligation, demanding more than a typical down payment. What are the aspects you need to consider when approximating the amount that you need to save to buy your preferred house?
First, determine where and how you intend to live. Having in mind a specific area where you want to relocate and the type of lifestyle you wish to adopt will help figure out the amount you need to save. Also consider the time of the year you will be moving since this can add or save 5% of the price of a house.
Homeowners associations recommend prospective home buyers first to ask themselves the following questions:
- Do you intend to reside in a rural or urban neighborhood?
- Do you mind about how long your travel is?
- Do you prefer to drive, ride the train, or trek to your desired destination?
- Would you mind neighbors in your building, or you opt for a standalone house?
- Do you plan on staying in the same place for more than 5 years to recoup your fees and home equity?
These questions will help you determine the best places suited for you.
Next, determine how much you can afford, depending on your existing income, expenses, and future ambitions. Note that simply because you can afford a big house doesn’t mean that you need one. It’s worth noting that real estate taxes are proportional to space, and therefore the more spacious your home is, the higher the real estate taxes.
Prospective home-buyers are advised to research the average price of a house in their preferred locale and calculate 20 percent of that price. That equates to your theoretical down payment. How long will it take to save such an amount?
Although it isn’t a must to devote 20 percent down on a home, this will serve as a blueprint to help you figure out the possibilities of owning a home in your dream locale since this is the magic number to avoid having to pay extra for private mortgage insurance. Also paying more on your down payment lowers your monthly payments and reduces how much interest you pay over time so it’s a great long term financial plan.
To become a bona fide owner of a house, a down payment alone is insufficient. Eventually, you should be in a position to finance the following: the down payment, relocating costs, closing fees, repairs, maintenance, emergency expenses, mortgage payments, and hidden expenses.
WARNING NUMBERS ALERT FROM A MATH NERD! Hypothetically if the price of the home you are looking to buy is $200,000 then optimally for your financial future you should put down $40,000. You will need to have an additional $6,000 for closing costs. Then you should factor in $1000 for moving, $5000 for repairs and maintenance that may come up, $1000-$3000 for new furniture for the bigger space, three months of mortgage payments which is an estimated $3600, $1000 for an emergency fund. For the sake of nice round number to comfortably afford a $200,000 house you should have $60,000 in savings, which may sound like an enormous amount for first time home buyers. However you may get by with a 5% down payment of $10000 if you can afford an extra $80 to $200 a month on your mortgage payment for the extra loan amount and PMI. The remaining section will go into those costs into more detail and provide extra factors to consider.
Contributing factors to how much you need to save to buy a home
Down payment
A down payment can range from 3.5-20 percent of the house’s entire cost, based on your mortgage interest rate, credit score, loan type, and prevailing financial situation. Despite the range, potential home buyers should put down close to 20 percent since it renders them a significant stake in the house promptly.
By doing so, you’ll be lowering your monthly payment in the long run. If, for instance, housing prices drop and you need to auction your house to prevent a full home foreclosure, you won’t be as much underwater if you have more equity in the house upfront.
Closing Costs
Buyers usually pay 3 to 4 percent of the home’s value in closing costs. Simply put, closing costs are expenses incurred for services that help facilitate the formal conclusion of a house deal. For buyers, closing costs entail home inspection, assessment paperwork processing costs, prepaid insurance and taxes, and many others.
When I bought my first home I actually negotiated for the seller to pay for the closing costs since I didn’t have much upfront money. However they countered with asking me to pay 3000$ more for the price of the home to be included into the mortgage loan to paid over 30 years which I accepted. So yes this was an option to get me into a great home sooner it will cost me slightly more in the long run.
It’s strenuous to give an estimate for these costs because they vary from one state to the other; however, none of them should exceed 1 percent of the entire home value.
Moving expenses
Transforming your new house into a decent home isn’t a walk in the park, as many people tend to believe. In fact, it takes time and a handful of resources to give it a fresh look.
Therefore, you shouldn’t overlook the resources it will take to make it more appealing. This is because you’ll need to buy furniture based on your available space and even redecorate with your favorite colors.
Except if your home is brand new, there are plenty of things that you’ll be compelled to upgrade or add. The desire to make a home homey prompts people to buy furniture once they relocate to a new house. Such upgrades and furniture come at a cost, thus setting aside a sizeable amount to cater to moving expenses.
Repairs and Maintenance
No house, whether brand new or refurbished, is free from imperfections. Therefore, as you prepare to move to a new home, have some cash in hand to cater to repairs and maintenance as well as preparing to take on some for yourself. For instance, if you crave privacy, you have to dig deep into your pockets to erect a fence which can sometimes cost as much as $10,000 or more. The same applies to your interior design, especially if you’re unhappy with the applied paint.
Moving forward, homeowners should be prepared to fork out 10-20 percent of the home’s value annually. That money is devoted to paying taxes, insurance premiums, mortgage payments, utility bills, maintenance, etc.
It’s also essential to have a savings plan to cater for unforeseen expenses such as leaky roofs or adding security systems.
Emergency Fund
Moving into a new home indicates that you’ve attained your savings goal, and therefore, it isn’t absurd to see your savings decrease. However, this doesn’t mean that you shouldn’t set up an emergency fund for the sake of your own families emergencies.
If buying a new home leaves you with less than $1000, then you might be forced to reconsider whether this is a viable idea or not. Draining all your savings to move into a new home isn’t recommended because it merely means that you can’t truly afford your desired home currently.
An emergency fund is crucial as it helps you prepare for the unexpected without plunging you into a financial crisis. Since we’re living in unprecedented times, homeowners are advised to set aside an average of $1000 as an emergency fund.
Conclusion
Owning a home comes down to extreme financial undertaking, and that’s why planning beforehand is highly recommended. The housing prices keep fluctuating, and in most incidents, they’re influenced by several factors such as location, state, size, type, etc.
Before embarking on saving, it is crucial to identify your dream locale and research the average house price. This will help you compute the amount you need to save to afford your dream home.
Besides house value, you should also factor in other expenses involved when moving to a new home, such as moving expenses, repair, maintenance, etc. Therefore, without taking everything into account, you’re bound to encounter financial hurdles in your quest to own a home.