For many people, a home is the biggest purchase they will ever make. While home buying can be confusing all on its own, saving up to buy a house can be even more confusing. Before you take the path less traveled and skip down the road to home ownership, understand the costs associated with buying a home and how to properly save for those costs.
Home buying costs include:
-Down payment (3 to 20 percent of the purchase price)
-Closing costs (3 to 6 percent of the purchase price)
-Home maintenance and repair (1 to 2 percent of the purchase price, annually)
Figure out how much home you can afford
Instead of subscribing to conventional wisdom, assuming that you can take on a loan that is four times your income, work backwards to establish your budget.
Calculate how much you can afford each month as a total house payment. Then, subtract your projected property taxes and homeowner’s insurance. Use that number as your baseline for a payment.
For example: If you are comfortable paying $1,500 a month, start here. Assume your property taxes and homeowner’s insurance will account for approximately one-third (30 percent) of your mortgage payment. Subtract that from $1,500.
$1,500 – 30 percent = $1,050
Multiply $1,050 by 30 years –the average mortgage term—and you will see that you can afford a house in the $300,000 range.
Save your down payment
When it comes to home buying, money talks. The bigger your down payment, the better your mortgage terms. Your goal should be to save up at least 10 percent of your down payment, but 20 percent is better. Once you know how much house you can afford, budgeting for the down payment is easy.
Using the above example, if your house were in the $300,000 range, your 20 percent goal is $60,000, and your 10 percent goal would be $30,000.
Budgeting techniques
Next, figure out how long it will take you to save those amounts. If you were to set a goal of buying a home in 5 years, you would need to save $6,000 a year to reach the $30,000 mark, and $12,000 a year to reach the $6,000 mark.
Break those numbers down. In order to save $6,000 a year you need to save $500 a month. To save $12,000 a year you’d need to double that. Once you break down the total down payment into manageable savings chunks it doesn’t seem so daunting.
Of course, there are ways to buy a home without putting as much money down, and budgeting for those are far easier. However, in a challenging real estate climate, fiscal responsibility is best. Budgeting for your home responsibly and living a little beneath your means puts you in a better position to build (and keep) valuable equity; this safeguards what will probably be your largest investment.