Saving for Home Ownership

Thinking about buying a home? A house is likely the biggest purchase you will ever make.

Because of the high costs involved, saving for it takes commitment, planning and sometimes sacrifice. And saving is about more than just having enough for a down payment. These are the factors you need to consider:

The Down Payment

One of the most important financial decisions you’ll make is how much of a down payment you can afford. Putting down 20% of the home’s purchase price is ideal. If you put less than 20% down, you will pay for private mortgage insurance (PMI), which costs between 0.5% and 0.85% of the loan amount. Unless you choose an FHA loan, PMI is dropped once the equity in your home reaches 22%.

Earnest Money

You’ll make a cash deposit when submitting your purchase offer to show the seller you’re a serious buyer. Funds — typically 2% of the purchase price — are deposited with the escrow company and applied towards the down payment. Funds are returned to you if the offer is rejected.

Closing Costs

Closing costs include all fees required to execute the sales transaction, such as escrow fees, title insurance, appraisals, points, lender fees and deposits to impound accounts. Costs vary, but the average cost is 3-5% of the purchase price.

Post-purchase Reserve Funds

Lenders require that you have reserve funds to protect against cash flow problems after your purchase. Plan to set two to three months of house payments in an easily accessible savings account.

Other expenditures you may want to save for are landscaping, immediate repairs, redecorating, new furnishings (particularly if you’re moving into a much larger space) and moving expenses.

Cost Breakdown

So how much money will you need to save? The actual figure depends on several factors, including current interest rates, whether you get a fixed or adjustable-rate mortgage, repayment terms and your credit rating.

Here’s a breakdown for someone buying a $400,000 home:

• 5% down payment: $20,000
• 3.5% closing costs: $13,300
• 2 month reserve fund: $5,138*
• Total estimated pre-purchase costs: $38,438

*$2,569 per month for principal, interest, taxes, insurance (PITI) and mortgage insurance.

Example based on a 30-year fixed rate mortgage, 4.25% interest rate, $5,004 annual property tax, $1,260 annual homeowners insurance, and $2,124 annual mortgage insurance:

Once you decide what a comfortable purchase price is, you can work out the amount you’ll need to save in order to make an offer. With your target date in mind, use this figure to set savings goals.

Need help setting your goals or revising your budget to fit them in? SESLOC Money Coaches can help.