Personal Financial Planning: Putting Home Ownership Within Your Reach
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Buying a first home is perhaps one of the most important personal financial planning decisions most of us will ever make. It ranks up there with choosing a college degree, career, marriage, and children. Fortunately, saving for a home can be within everyone’s reach, because you can get there by working smarter — not harder — at some things you already do today. But that’s not to say it’s going to be easy, given the high costs involved in buying a house today. The general rule of thumb is that you can afford to buy a house that’s three times your annual household income. Using an online financial calculator can help you to find out how much home you can afford. With that in mind, here are some general costs you can expect to incur when buying a house:
Down Payment
The down payment will be the most onerous and significant expense by far. Down payments can vary from no down to all down, but 20% of the purchase price is what you’ll generally need to get the most favorable mortgage terms and avoid the purchase of mortgage insurance.
Closing Costs
Closing costs are all the fees required to complete the home sale, including local government fees, title insurance, appraisals, points, and tax escrows. These typically vary between 2-3% of the purchase price.
Reserve Funds
Saving at least three months of housing payments will provide you with some peace of mind after your home purchase — especially if you decide to pay property tax separately from your mortgage payment. This also lets you avoid having to dip into credit card debt.
Now that you know roughly what you’re going to need to save, you’re ready to get started your personal financial planning on the road to home ownership. Mint sees that road as having three distinct phases: Cleaning, Foundational, and Building.
Getting your Financial House in Order
Even before you begin saving for your first home, there are a couple of critical short-term goals you’ll want to meet.
- Pay off your debts and avoid carrying any balance on your credit cards. The finance charges alone are a virtual wall between you and your ability to make a large investment like a new home.
- Improve your credit report and score. A good credit score can help you quality for a loan with the best deal in terms of points and rates. Check out FreeCreditReport.com for a free credit report and credit score.
Don’t forget that you can also request a free credit report from AnnualCreditReport.com every 12 months.
Lay a Strong Foundation
- Determine how much you need and by what date.
- Sites like Zillow.com can give you estimated prices for homes in the neighborhoods that you’re eyeing.
- Assume 22-23% of the home price will be needed up front for your down payment and closing costs
- Estimate three months of mortgage payments using tools like this payment calculator from Yahoo.
- Remember, if you’re already paying rent today, you’ll need to save only the difference between your monthly rent and your estimated monthly mortgage.
- Open a separate, high-interest savings account, money market account or a certificate of deposit (CD) that serves as your New-Home Fund.
- WaMu Free Checking and Savings
- 3.75% APY Savings at WaMu.
- Sign Up
- HSBC Direct Savings
- No fees & no minimum deposit.
- Sign Up
- Calculate what you’ll need to save monthly to get to your goal by your target date. One nifty online financial calculator can be found here.
- Lastly, setup direct deposit with your employer so that a portion of your paycheck is automatically transferred into a separate “home fund.”
Build your New-Home Fund. Easily earn rates 11 times higher than that of the national average. Taking advantage of high yield savings account will allow you to earn extra interest so you can better meet your saving goals.
Accelerate your savings. Here are two accounts that offer high-interest.
Start Building
- Make some personal financial planning decisions on where you’re going to save. By the way, it makes sense to include the entire family in this part of the process. It’s always easier to make sacrifices when everyone is shooting for the same goal.
- Use Mint to identify specific spending categories or merchants that you can reduce or eliminate.
- If you choose to get help with the down payment from friends and family, they can also use Mint to plan and budget their contribution.
- Track your spending and saving regularly. Mint allows you to set up budget alerts to notify you if you’ve exceeded your target level in any month.
What the hell? FreeCreditReport.com? I realize that you’re probably getting paid for that little reference, but saying that FreeCreditReport gives you a “free credit report and score” is completely wrong. You’re required to enroll in a service and provide your CC number (big warning sign) in order to get your “free” products. Encouraging your personal finance customers to give in to misleading advertising is not exactly a healthy step on the road to buying a home.
If you want a REAL free credit report, visit the government-run AnnualCreditReport.com.
Janna: Actually because the article mentioned credit score and not just credit report only, we referenced FreeCreditReport.com from Experian, as it is one of the only credit reporting agency that provides a free score trial. Another place where you can get a reputable credit score will be myFICO.com, which runs about $16 for each score. There’s currently a discount code for 25% off if anyone’s interested: HOLIDAY25.
AnnualCreditReport.com is owned by the three credit reporting agency, created due to the recent FACT ACT. It allows for the request of a credit report every 12 months, but unfortunately doesn’t currently provide for a free credit score. Thanks for the reminder, as we’ve made reference to AnnualCreditReport numerous time on mint.edu. I’ll update the post.
Lastly, setup direct deposit with your employer so that a portion of your paycheck is automatically transferred into a separate “home fund.” You’ll barely feel a thing, and before you know it, you’ll be glad you did.
I’m sorry but this statement is just pleasant BS. This isn’t MSN Money, you’re not Weston or Dunleavy here trying to coddle us. If you have any clue about where your money goes (maybe b/c you’ve been using Quicken or Money or Wesabe or Mint), then you will feel the crunch.
The average home purchase price was 220k last year! That means that the average family (starting from scratch) will need to save 44k, given that the median household family income is just a hair over 48k, that 44k is a long ways off. To put this into perspective, that’s ~$900/month for four years or $450/month for 8 years.
Even if you’re in the top 20% of income earners with a household income of 88k, you’re going to notice the missing 11k every year (that’s 12.5%!)
Except for the statement quoted above, all of the advice in this column is correct (if trivially so). But what’s also true is that the cost of saving for a down-payment this decade will hit your pocketbook unless you plan on some lifestyle changes.
So don’t just goal plan, life plan. Draw up your budget with and without the downpayment and balance that against your actual wants. Renting is almost universally cheaper (and if you’re saving for a downpayment, you’re probably renting right now) so it’s quite likely that the money you’re “saving for your down payment” will pretty much be gone every month ad infinitum. Once you’ve made the down payment, that money will just be redirected to maintenance, repairs, upgrades, property taxes and the higher cost of the mortgage.
So if you’re running about even every month right now, then saving for the down payment is going to put a dent in your lifestyle. Acknowledge that you now have significantly less disposable income and learn to accept the new lifestyle (and make sure the deposit is automatic b/c you will be tempted back to the dark side).
Gates VP, thanks for the feedback. You’re right that the average family is going to “feel the pain” of saving that downpayment. So much so that we thought it was important to highlight that getting the whole family’s commitment is an important factor in success. The impact of canceling annual vacations or delaying big purchases will be felt throughout the household. “Barely feel a thing” was a poor choice of words and we’ll change it.
I know, first hand, how stressful it is to save for a home. I’m saving for a down payment, too. Now is the time to buy, right? I work for FNBO Direct and wanted to share the Pay Yourself First Challenge. I sure wish I could enter. Check it out: http://www.pyfchallenge.com/
You could earn an extra $5,000 for your down payment.