11/20/2007

Personal Financial Planning: Putting Home Ownership Within Your Reach

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.

1. 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.
2. 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

1. 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.
2. Open a separate, high-interest savings account, money market account or a certificate of deposit (CD) that serves as your New-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.

E*Trade Max Rate Savings

No fees & no minimum deposit.

Sign Up

HSBC Direct Savings

No fees & no minimum deposit.

Sign Up

3. 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 hereor check out our list of investment calculators.
4. Lastly, setup direct deposit with your employer so that a portion of your paycheck is automatically transferred into a separate “home fund.”

Start Building

1. 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.
2. 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.

Home ownership can be within your reach. Sign up for Mint.com to get the tools you need to get started today!

Further Reading on the Topic:

personal financial planning

online financial calculator

financial planning tool

home budget