Since buying a home is such a large part of a person's life, no one wants to make a mistake. It would be a costly mistake if you did make one.
Recently, I received a reader request for a new post about buying a home. The reader asked:
I would love to see a post on the best way to save up to buy a house, i.e. what is a good percentage to put for the down payment, what other costs should be saved for such as homeowners insurance, inspection fees, etc.
I think this is a great question. I am not a home buying expert, but I have bought a home in the past and we are in the very, very beginning stages of buying our next.
With our first home, we got a great deal and bought a house that was much lower than what the bank approved us for. We researched like crazy and thought about all of the different little expenses that would come up when you own a home so that we would not be surprised. There were still a few surprises, but for the most part nothing was too shocking.
However, this is not how many people buy a home. Many people buy a home by only looking at the sticker price, and not really thinking about anything else. There are many expenses that go along with buying a home and all of these little expenses can really inflate the price.
Below are questions you may want to ask yourself before deciding on a home:
What expenses come with a home?
There are many expenses that come with buying a home. All of the different home expenses should be budgeted into what you can actually afford. I always think it's best to be as prepared as possible.
Possible home expenses include:
The actual home. Okay, this one is obvious. This will be the price you actually pay for a home. You need to think about your interest rate and closing costs in this area too. Your interest rate can vary and even just a difference of one percent could mean a hundred dollar or more difference each month.
Property taxes. This can vary widely from city to city and state to state. It's always best to look at the property taxes before bidding on a home. One house that is priced in one city might have property taxes of $2,400 a year ($200 a month), and a very similar house with the exact same price in another city (and yes, it could just be a mile down the road) might have property taxes of $4,800 a year ($400 a month). That difference in property taxes might be what puts you over your budget.
Home insurance. For this, you want to think about all parts of home insurance. Will your home need any added insurance? Such as for earthquakes, flooding, or hurricanes? Our home insurance is fairly cheap, at around $700 per year. I know someone who pays $2,800 for their annual home insurance though. Prices can vary greatly depending on where you live and how big your home is.
Bills. Different homes will have varying amounts when it comes to bills. For example, older homes tend to have higher utility bills because of inefficiencies in the home (air flow throw cracks in windows and doors, old furnace, etc.). For example, one home that cost $300,000 might have a monthly electric bill of $75 per month. Another home with that exact same price might have a monthly electric bill of $500 per month. Some of the bills you might expect (related to your home) include electric, gas, trash, sewer, water, cable, and more.
Inspection fee. This is usually a one-time fee. Before you buy a home, you should ALWAYS get a home inspection. Don't skimp either. I recently saw someone on Facebook who was looking for a home inspector and she said she just wanted the cheapest thing possible and she didn't care what the inspector checked. This is a HUGE mistake. I know someone who skipped a home inspection and a week into moving in, the bathroom upstairs flooded and the floor caved in. This was a ton of damage, and it turned out the problem had been building up for quite a long time. This means a home inspector most likely would have caught this. Different areas you might want to have checked include: the foundation; radon (don't skip this. We almost did and our realtor advised us not to. Our home actually failed the radon test and we negotiated to have the radon equipment included in the sale contract); mold; termites; plumbing; electrical system; and more.
Furniture and appliances. I know someone who recently bought a home but was complaining that it was completely empty. They said they forgot to budget in furnishing the home, which turned out to be more expensive than they thought. So instead, they had boxes for end tables and only a bed in their new home. Furniture and appliances is an area you should not forget about unless you truly do not care. There are ways for you to save money (such as shopping on Craigslist), but it can still all add up very quickly.
House repairs and maintenance. Don't forget about this! Home maintenance and repairs can include a lot. This includes:
- Yard cleanup such as collecting leaves and mowing the lawn;
- Plumbing such as replacing new pipes, clogs in drains, and so on.
- Paint. Both interior and exterior.
- Electrical. What if a squirrel chewed through your wiring?
- Windows. What if a window broke?
- HOA. I wasn't sure where to put this but I think this category is best. Before you buy a place, you should figure out if you want to belong to a homeowners association or not. Their fees can add up quickly.
- The list goes on and on…
How much should I budget for a new home?
This is a hard question to answer.
Whatever you budget, you should always keep in mind the total cost of a home. There are many mortgage calculators and mortgage affordability calculators out there you can Google search for that will help you determine a budget.
As you can see above, there are many expenses that go into the total cost of owning a home.
It can be hard to decide on a budget for a home and to actually answer the question “How much can I borrow?”
It's really just a realistic number that you feel comfortable with. Some people take out a loan that is around 25% to 30% of their after-tax take home income.
For me though, I like to stay significantly lower than that though. I would rather have my mortgage and home related expenses to be somewhere around 10% to 15% of my monthly after-tax take home pay. This is because I am a freelancer, so my income is not stable. I also live in a low cost of living area where housing is cheap, so I could never really imagine paying a crazy amount for a home when I am used to cheap home pricing.
Whatever you do, you should always have a budget in mind before you start home shopping. Also, try to get pre-approved before you go shopping for a home as well because you never know if you will even get approved.
One last note for this section: Your budget does not have to be the same budget that the bank gave you. Banks are notorious for lending out more than people can realistically afford. This means you should take the bank's budget as a guide, but you will probably be better off if your budget is lower than theirs.
I highly recommend that you check out Personal Capital if you are interested in gaining control of your financial situation and buying a house. Personal Capital is very similar to Mint.com, but 100 times better. Personal Capital allows you to aggregate your financial accounts so that you can easily see your financial situation. You can connect accounts such as your mortgage, bank accounts, credit card accounts, investment accounts, retirement accounts, and more, and it is FREE.
How much should I put down for a down payment on a house?
This is another tough question to answer, as there is not a single solution.
For us, I always thought our next home would be paid for completely in cash (many years down the line), but now it just seems like there are many positives in not rushing this process (there are both positives and negatives in not paying a home off early).
In some cases, you may be able to put down just 2.5% on your home, whereas other times you are asked to put down 20% or 30%.
How much you put down on your home really depends on if your goal is to pay it off early or not, and how much you can truly afford.
If you don't care about paying off your home early, then putting 50% down may not make much sense if there are better investments out there and you don't feel comfortable putting all of your money down. If you want to pay off your home in a “normal” 30 year rate, then putting down just the minimum (without having to pay PMI – see below) that your bank allows you might be best.
I will say that if you put down less than 20%, you will most likely have to pay private mortgage insurance (PMI), which can be a couple hundred dollars tacked onto your mortgage each month. This might be an expense that makes a home no longer affordable.
However, if you want to pay speed up your home payoff plan, then you might decide to put down as much as you realistically can afford in order to jump on your home payoff goal.
How much do you think a person should save up for a house?
Are there any other expenses I forgot about?
Image via Flickr by robboudon
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