How to Save for a House

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You’re at the point in life where you’re starting to dream of owning a new home. Awesome!

Buying a house is one of the best investments you can make, but it can also be one of the most complicated financial tasks that you go through. How you prepare makes all the difference.

This post is a primer about how to save for a house so that you can get a leg up in the competitive residential real estate market.

For starters, let’s take a look at the various home-buying costs to factor in so you have a better picture of how much to save.

Costs of Buying a House

First-time homebuyers are often surprised to learn about all the unexpected costs they encounter along the way. Buying a new home is an expensive process, making it difficult even for people who are good at saving and budgeting.

Here are some of the top costs that homebuyers must consider.

Loan Application Fees

If you want a bank to take your offer seriously, it’s a good idea to go through a pre-qualification and pre-approval process from a mortgage lender.

Getting pre-approved and pre-qualified requires gathering a variety of financial documents and submitting them for review. For example, this may include tax documents, a credit report, bank account information, and proof of employment, among other things.

It’s a good idea to shop around to secure the best interest rates on home loans. However, keep in mind that some lenders can charge fees ranging between $300 to $400.

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Inspection and Appraisal Costs

Once you get pre-approved for a mortgage and go to make an offer on a house, you’ll have to go through various inspections and appraisals. That’s because your lender wants to ensure that the home you are investing in is worth the agreed-upon purchase price.

Home inspections are crucial because they can help the buyer understand the quality of the prospective home and identify any areas that need improvement. An inspection can cost anywhere from $400 to $600 depending on the size of the house.

An appraisal is a financial valuation of a home, and they are required when you want to shop for a mortgage. An appraisal can also run anywhere from $400 to $600.

Inspections and appraisals typically come a little farther along in the home buying process, after you have been approved for a home and submit an offer. You don’t have to worry about shelling out a ton of money on this process, however, it’s a good idea to set aside anywhere from $2,000 to $3,000 just to be sure.

The last thing you want is to not be able to move forward with your home purchase because you didn’t save money for the inspection and appraisal steps.

Down Payment

When you take out a mortgage or home loan, you need to pay a down payment on the property as an initial offering.

Down payment amounts vary depending on the type of loan for which you qualify. For example, if you qualify for an FHA loan (for low- to moderate-income borrowers), you have a lower minimum down payment of 3.5%. The minimum down payment for a conventional loan is just 3%. But, if you have a low credit score or high debt-to-income ratio, a lender may require you to put down more.

Best practices call for a down payment that’s 20% of the purchase price so that you can avoid private mortgage insurance (PMI), and, likely qualify for a better mortgage interest rate.

So if your house goes for $200,000, you’ll want to have about $40,000 set aside for down payment savings. Understandably, this isn’t possible for everyone. If 20% is out of the question, go for at least 10%, or consider waiting until you have the money.

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Closing Costs

There are a variety of closing costs that you also have to pay. For example, closing costs may include origination fees, title searches, title insurance, title transfers, land surveys, deed recording fees, and real estate agent fees.

Believe it or not, closing costs can amount to a whopping 2% to 5% of a total loan amount. That means if your loan is for $200,000, your closing costs are likely to run between $4,000 to $10,000.

Moving and Relocation Expenses

Don’t forget to budget for the costs of moving your items and relocating to a new area. Set aside another $2,000 to $3,000 depending on how much stuff you have and how far you’re going. If you need to move across the country and hire a professional moving company, that number is going to go way up.

Monthly Mortgage

Your mortgage payment is what you can expect to pay the bank every month throughout your 15 or 30-year mortgage loan.

For example, a $200,000 mortgage at a 3.92% interest rate over a 30-year period is going to result in monthly payments of roughly $946. This number can vary widely depending on your property taxes, so keep that in mind, too.

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Homeowner’s Association (HOA) Fees

If you purchase a unit in an apartment or condo, you’ll most likely need to pay HOA fees on top of your mortgage payment, property taxes, and homeowners insurance.

HOA fees are separate monthly charges that cover the operating costs of your building, such as routine maintenance, landscaping, snow removal, security, and other amenities.

The amount of money you have to pay toward HOA fees varies depending on your location and the quality of your home. They usually range anywhere from $100 per month to $600. In New York City, however, the average HOA fee is over $1,500 each month. Ouch!

TIP: Be very cautious about places that have low property values and heavy HOA charges.

Home Repairs

Unforeseen home repairs can easily cost thousands of dollars. Best practices call for setting aside roughly $10,000 annually to cover home repair and maintenance costs.

This is why it’s important to have a solid emergency fund set aside. If you buy an apartment or condominium where maintenance is included, you can probably cut this figure in half.

Top House Saving Tips

Now that we’ve walked through all the things that need to be paid for, let’s take a look at some common-sense strategies for building up your down payment nest egg.

Focus on What Matters

Would you rather own a home or drive a new Mercedes? Is going on a luxury vacation more important to you than owning a home?

These are common questions that you’ll need to be real with yourself about.

Look at it this way: The more money you are spending each month on unessential items (expensive cars, vacations, clothes, cable TV, and dining out) the less money you’ll be able to set aside for your home purchase.

So, if owning a home is at the top of your to-do list, prioritize saving up for it above all else. That extra $550 each month for a new car payment adds up to $6,600 each year that you could have saved toward a down payment (assuming you can otherwise still get from point A to point B).

Keep a Budget

Having a budget is essential for anyone who is looking to own a home.

If you know that you need to save $85,000 to buy your dream condo, write out a plan for how much money you need to set aside each month, and each year, to reach that amount.

For example, if you are able to save $1,000 each month, it’s going to take you about seven years to get there. If you want to shorten that time, you’ll have to adjust your spending and saving budget accordingly.

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Avoid Credit Card Debt

As a homeowner, it can be tempting to start putting items like application fees, inspections, and repairs on credit cards. If you use credit cards, always pay down your monthly balance at the end of each month to prevent interest from accruing.

Pro Tip: Furnishing your home can get expensive. Once you land your dream home, watch out for the trap of racking up thousands in credit card debt on new furniture.

Start a Side Hustle

The more money you have on hand, the better off you are going to be. Consider starting a side hustle, such as building websites, or driving for Lyft or Uber to supplement your income. This can be a great way to pad your savings.

Plus, having additional income sources looks favorable when it comes time to secure a loan.

Get a Better Job (or Ask for a Raise)

This might seem obvious, but the quickest way to earn more money is to get a higher-paying job, or to get a raise from your current employer.

The more money you are earning each month, the more money you can stash away toward your home purchase.

Where to Save That “House Money”

Now that you know buying a new home requires many thousands of dollars, it’s time to get strategic about where to allocate this money.

High Yield Savings Accounts

There is no better place to store your down payment funds than in your high yield savings account (HYSA). That’s because you can earn some interest and it’s easy to move money from your HYSA to your checking account when you need it.

That said, most HYSAs require two to three business days for funds to transfer. Alternatively, you could consider opening a money market account, which can allow you to write checks.

Checking Account

Having quick and easy access to your funds is important when you want to buy a home. Use a checking account to keep extra cash on hand for unavoidable costs like the appraisal and inspection. Keep roughly $3,000 to $5,000 available in checking at all times. If that seems like too much, you might not be ready to buy a home yet.

The Stock Market

One trick to getting ahead with investing is maximizing diversity. You don’t want to go all-in on real estate, especially since it’s unlikely you’ll be generating any income from your house.

Consider putting a portion of your savings into stocks, index funds, and mutual funds. This way, your savings can grow and take advantage of compounding interest and returns. Keep in mind, though, that you shouldn’t invest any money in stocks that you can’t afford to lose. And don’t fall into the trap of treating stocks like lottery tickets — invest in great companies that you believe have a bright future.

You may also want to open a retirement account like an IRA or Roth IRA for long-term savings. Once your money is invested in a Roth IRA for over five years, you can take it out and use it toward a home purchase without incurring a penalty.

Frequently Asked Questions

Is saving for homeownership difficult?

It doesn’t have to be, so long as you make the right spending choices, avoid debt, and stick to a budget. If you are reckless with money, however, you might never get there.

When should you start saving for a house?

Ideally, you can start saving for a house in your early to mid-20s. Even if you don’t want to buy a house right away, you’ll be way ahead of the game.

That said, it’s never too late to start saving, and your personal financial situation may change when you least expect it. For example, you may decide to get married, increasing your need to have a house (and your income, if your partner works too).

Can you get a mortgage while paying down student loans?

Yes, you can get a mortgage while paying down student loans. It all comes down to how much you are earning and how much cash you have saved up. In fact, paying down student loan debt can indicate that you are a worthy borrower to a financial lender.

The Bottom Line

The bottom line is that saving money to buy a house takes patience, discipline, and sacrifice. If homeownership is truly your goal, you must prioritize how you spend your money and save as much cash as you can. It’s that simple.

Take a look at your monthly cash flow and determine how long it’s going to take you to save up for your down payment and all of the other costs you learned about above. Focus on earning more and saving more and stick to your monthly budget.

Before you know it, you’ll be one of the 65% of U.S. residents that owns a home. From my experience, homeownership has been worth every penny.

Good luck!

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