When you buy a home, you’re making an investment in yourself and your future. You’re building financial stability, equity, and experience. You have a place to call your own and you can customize the space just how you want.
As with any major purchase, there are some upfront costs to owning a home — primarily a down payment. Find out how much you should budget for using a home loan affordability calculator and figure out how to save the amount you need. After all, the best way to save for a house is to formulate a clear plan. Soon enough, you’ll be turning the key and stepping into a home you love.
Decide What Your Budget Is
Before making a purchase — or even shopping for houses — you should look at your budget. Just because you were pre-approved for $300,000, doesn’t mean that’s what you should spend. In fact, it’s best practice to purchase a home you can comfortably afford along with your other living expenses, long-term financial goals, and discretionary spending like shopping and vacations.
To determine a mortgage payment that’ll work for you, calculate monthly amounts for the following categories. If you’re living with someone, like a partner or spouse, include their income and expenses, too.
- Total your income: Figure out your after-tax monthly income, including any tips or commissions you usually receive.
- Determine your living expenses: Add together the cost of your utilities, groceries, child care, transportation (including car payment, gas, and insurance), and health care.
- Include your long-term goals: Calculate the monthly amount you plan to put toward your student loan payments, emergency fund savings, and retirement.
- Remember your discretionary spending: Include expenses you won’t want to forgo, like a gym membership, streaming service, or weekly dinner with friends.
- Estimate your home expenses: Use a mortgage calculator to determine how much a potential home will cost you monthly, including your mortgage, property taxes, and house insurance. Consider incorporating a buffer for repairs and maintenance costs.
After comparing all of your expenses to your after-tax income, you’ll get a clearer idea of how much you should spend on a home. As a guideline, many experts recommend spending between 25-28 percent of your monthly income on your home, including the mortgage payment, property taxes, and house insurance. Most importantly, though, look at your own figures to decide what’s best for you.
How Much Should Your Down Payment Be?
A down payment is an initial payment made at the onset of a large purchase. Down payments for homes typically range from 5 to 20 percent of the total purchase price. Many lenders like homebuyers to put down 20 percent, but it’s not required. For example, if you have student loan payments and child care costs, a large down payment might not be realistic. Most lenders require a minimum of 5 percent, but you could also put down 10 or 15 percent.
There are some benefits to a larger down payment. For example, if you’re unable to put down 20 percent, you’ll have to pay for private mortgage insurance (PMI), because the lender sees it as a riskier loan. PMI costs anywhere from 0.5 to 1 percent, which can increase your mortgage payment significantly. Avoid paying PMI by waiting longer to buy a house (allowing you to save more), purchasing a less expensive home, or borrowing money for a down payment.
As you search for a mortgage loan company, keep an eye on interest rates. Rates depend on how long your loan is — 15-year vs. 30-year — along with your credit score, and whether you’re building or buying a home. Your interest rate determines how much you’ll pay in interest over the life of the loan, so pay close attention to them. A fixed mortgage rate is recommended, as the rate will stay the same for the duration of the loan. An adjustable interest rate is subject to change at any time and could increase significantly.
Set a Timeline and Goal
Studies show that when we write down our goals, we’re more likely to achieve them. By assigning a specific dollar amount and a target date for your down payment, you’ll be hyper-focused to achieve that goal. For example, you could set your goal to have a down payment of $25,000 saved by March 1, two years from now. Put the date on your refrigerator or bathroom mirror so you’re constantly reminded of your goal.
You’ll also want to break down your overall goal into a monthly figure. For example, say you need to save an extra $400 per month to achieve your down payment by your goal date. A monthly savings amount is less daunting and helps you to stay committed over time. Savings tools like Mint can help you achieve your goals by tracking your spending and offering you suggestions on how you can save more.
Many people find the best way to save for a house is to reduce discretionary spending — things or activities that you can go without. For example, you might be able to scale back on eating out. Consider packing your lunch for work or making your coffee at home. You can also save on your food budget by buying your groceries in bulk and choosing store brands over name brands. Other savings techniques include freezing monthly subscriptions or buying second-hand items instead of brand new. While these purchases might seem small, the savings can add up fast. You can also sock way more money every month by picking up a side hustle, freelancing, or creating passive income streams.
Other Costs to Consider
Beyond your down payment, there will be some other upfront costs to buying a house. These expenses vary based on where you live and the current housing market.
Appraisal costs: Appraisals assess the home’s value and are usually ordered by your mortgage lender. They can cost anywhere between $300 to $400 for a single family home.
Home inspection: A home inspection typically costs $250 to $350 for a single family home. Prices vary depending on what you want inspected and how thorough you want the report to be. For instance, if you want an expert to look at your foundation, there will likely be an additional cost.
Realtor fees: In some states, the realtor fee is 3 percent of the home’s purchase price. Depending on the market, the seller might pay for your realtor fee. In other places, it might be more common to contract a lawyer to look over your purchase agreement, which is usually cheaper than a realtor.
Appraisal and closing costs: Appraisals assess the home’s value and are usually ordered by your mortgage lender. They can cost anywhere between $300 to $400 for a single family home.
Additionally, there’s a fee paid to the title company to transfer the house title into your name. This process verifies that the title is clear of any liens or other issues. There might also be a mortgage loan origination fee.
When you purchase a home, you’re building a piggy bank for your future. Every month you pay your mortgage, you pay part of it to yourself because you own the home. Instead of paying rent to someone else, you reap your own investment when you sell. Most importantly, though, you’ll have a place that’s truly your own.