If you plan to buy a house, you might be wondering how much money you need to save. This is a great question, as purchasing a home can have many hidden costs. Preparing your budget will greatly help you in your homeownership journey.
Buying your own home is one of the best investments anyone can make; however, having the appropriate budget can help you in so many ways.
Rushing into a milestone such as buying your own house can lead to additional costs in the future. This article will cover several costs to consider when saving for your home.
Let’s begin!
The average cost of buying a home
One of the biggest steps when planning your budget is figuring out the average cost. Once you have this figure, you can outline your budget accordingly.
Apart from the actual price of the home, there are several sub-prices you need to consider. Once you factor in these costs, you will know what to plan for when making your budget. These include:
- Down payment
- Closing costs
- Moving expenses
Now that you know what amount to aim for let’s go over each of these topics in detail.
Get an estimate
Before you start thinking about down payments and closing costs, you need to have an estimate of the house to plan to purchase. Many real estate websites offer tools that help you find a house within your budget. Zillow is one of the best real estate websites that give you an in-depth look at the finances of your potential home.
With Zillow, you can insert your desired house price, down payment amount, interest rate, and mortgage length to get an idea about the house that fits your budget. This estimate will give you a better grasp of what fits in your budget and what does not.
A smart way of buying a house is to save up at least 25% of its sale price in cash to cover additional costs. If you are buying a house worth $300,000, you should save up to $75,000 to cover additional payments.
This might seem like a steep number; however, prices are rising every year, and it’s always good to leave some room in your budget.
Down payment
A down payment is often one of the highest costs in your home buying process. Many buyers should aim to save up to 20% of their home price for a down payment. You need to put down 20% to avoid private mortgage insurance costs on a conventional mortgage.
The average sale price for homes in Q3 of 2021 was around $400,000; you would need to save approximately $80,000 to make a 20% down payment.
If you can find the space in your budget, you should always aim to make a large down payment as it will reduce your monthly costs, including monthly interest. If a 20% payment is out of your budget, try not to go below 10% for the down payment.
A 20% down payment can seem unrealistic and unaffordable for many people. In this situation, there are many options available to reduce the cost of your down payment.
Many government-sponsored mortgages require a smaller down payment. If you get an FHA loan, you are only required to pay as little as 3.5% of the down payment for first-time buyers. If you qualify for a VA loan, you don’t have to pay any down payment. These options can be great for those who find the 20% payment too steep. Can’t save enough money for the deposit? Try the the 50 20 30 rule, many people are unaware of its efficiency and are missing out on how much you can save with it!
Once you have your down payment figured out, you will be closer to purchasing your dream home.
Closing Costs
The next payment to consider after the down payment is closing costs. Closing costs are considered a hidden cost as many buyers don’t expect them. Real estate transactions are complicated, and even after you have made and accepted an offer, additional costs need to be paid.
Closing costs usually cover several house-related expenses. These include:
- Title inspection
- Home inspection
- Home appraisal
- Setting up an escrow account
- Property taxes
- Property insurance
- Any extra mortgage costs
These might seem like many payments, but most buyers should aim to pay around 3-4% of the home’s sale price for closing costs. For example, if you purchase a median-priced home for $400,000, you will need to save $20,000 to cover 5% of the closing costs.
Lender fees are also a part of the closing costs. These are smaller fees and usually cost between $50 to $100.
Appraisal and inspections are other important aspects of closing fees, and many lenders require a home value appraisal from a third party.
If the home is overvalued, it will be harder for the lender to recover money, and if you decide to sell the house without an appraisal, you will find it difficult to make money. An inspection is important to make sure the house is structurally sound. This can help you avoid any surprise costs in the future.
You can include some of these costs in your mortgage; however, paying them upfront will reduce the need to borrow more money. Ensure that your lender gives you a loan estimate that lets you know about all the closing costs.
Moving expenses
Many buyers forget to include moving expenses into their budget, but this is a high cost. Whether you are hiring professional movers or handling the move yourself, you need to think about the cost of boxes, vehicles, etc. Your moving cost also includes how far you are moving.
If your new home doesn’t offer furniture or appliances, include the cost of these items in your moving expenses. If you want to remodel or repair any part of your new home, try creating a separate fund for these expenses.
Final takeaway
Buying a house can be a complex and long journey. There might be hidden costs that you wouldn’t have thought of. With this list, you can create an outline for your homeownership budget and get one step closer to your dream house.
