t’s exciting to dream about that first home. Browsing through online real estate listings, flipping through decorating magazines, and driving through neighborhoods imagining you’re driving home. When it comes time to make the dream a reality there is a lot of number crunching involved. One common question for first time home buyers to ask is “how much do we need to save for the down payment?” A typical down payment is often 20% of the purchase price, but it can be much lower when the homeowner either pays private mortgage insurance (PMI) or obtains a government loan allowing a low down payment or even none at all.
When formulating the plan for saving for the down payment, it’s critical to consider the other expenses that come along with buying, financing, and living in your own home. Here are five additional items to save for:
- Closing Costs
Estimate about 3 – 6% of the loan amount in closing costs. This includes charges such as the fee from the bank or mortgage company, paying for an appraisal of the property, title insurance, transfer taxes, and a fee for the attorney or escrow agent who performs the closing. You’ll also need to fund your escrow account which will pay your property taxes and homeowners insurance.
In order to get approved for a mortgage you’ll need to show the lender that you’ll have some additional money left over after moving day. Of course your income will be factored in, but the bank or lender will want to see that you have enough in savings (or “reserves”) to cover a few months’ mortgage payments in the event of an interruption in income. Exactly how much you’ll need will depend on the home loan program you’re applying for, so ask your loan officer what to expect.
- Moving Expenses
Whether you are moving across town with a buddy’s pickup or across the country with a team of professional movers there is always a cost involved. Once you move in there are often unexpected purchases such as a few more trash cans, blinds you thought the previous owners were leaving, or a new coat of paint when you realize you actually won’t get used to that neon orange bathroom. Having a budget set aside for moving and settling into the new home will ease the stress of those first few days.
- Repairs & Maintenance Fund
Finally having a home you can call your own means you also own the faucet when it starts leaking, the washer when it’s making a crazy banging noise, and the roof that looks like it might need to be replaced. The cost of maintaining and repairing a home and all its components can come as quite a shock to new homeowners. A good rule of thumb is to save 1% of the value of the home annually to prepare for these expenses. Some years you will hopefully spend less than that allowing the fund to grow. This way when a large project is necessary it won’t send you into debt.
- Emergency Fund
As explained earlier your mortgage lender will be checking to make sure you have enough saved to cover your loan payments for a few months in case of an emergency, but what about all your other expenses? Whenever possible it’s good to have enough in accessible savings that you could live for three to six months. (You can count your reserves towards this emergency fund.)
Don’t worry if you take a look at your bank statement and don’t see enough for all of these items right away. It generally takes time to save the money needed to buy a home. Having a goal and an accurate picture of what you need will help you achieve your dreams of home ownership that much faster.