How to Save for a House
In this article I am going to discuss how to save for a house. Learn 13 simple tips for how to save money for your first house (or your next house)! With these easy steps, you can save money for the down payment for your home in no time! These tips for saving to buy a house will help you to make your dream of becoming a homeowner a reality. 🙂
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13 Simple Tips on How to Save for a House
If you are looking for how to save for a house, then this article is for you! Here are 13 of the simplest and best ways for a family or individual to save for a house.
For most families, housing is their largest expense. So the more money that you can save and the bigger you can make your down payment, the better so that you can reduce your monthly house payment and pay off your mortgage more quickly! #debtfreeisthewaytobe
As I write this article, the housing market is back up in Crazyville again in many areas in the U.S.—meaning that prices and demand are high. It’s a seller’s market. But you may still want to buy a home, and you may be in a good financial position to do so.
If you are financially ready to buy a home, then the sooner you start saving for your home, the better because the bigger a down payment you can save up.
So if your family is ready to start saving for your first home (or to upgrade your home), even if you’re not looking to buy for a few years or even several years, here are 13 steps you can take to save for a house.
1. Earn a steady income.
Before you even begin to save up to purchase your first home, it’s crucial that you have a steady, reliable income.
Check out this article for 11 simple tips to make more money.
2. Have a fully funded emergency fund (EF) in place before you begin to save for a house.
Before you begin saving for a house, you should also have at least a three- to six-month emergency fund that could cover basic expenses for that period of time in case something were to happen to cause you (or your spouse) to lose your income for a time or in case you had to replace an expensive item such as your car or had a major medical bill.
Having a large emergency fund is primarily so that you can be prepared financially in case something happens to you after you buy your home so that you don’t miss payments and risk losing your home to a foreclosure, but having substantial savings will also help you qualify for financing for your mortgage and will help you get the best mortgage interest rates.
It will also be very helpful if you discover there are things that you need to fix once you move into your home (that aren’t covered by your homeowners insurance—which can definitely happen and did happen to us shortly after we purchased our second home).
3. Start to save for your house.
Once you have a full emergency fund, start saving aggressively for your home purchase. Depending on your timeframe, determine which saving method will be best for you. For most people, their timeframe is probably around five years or less, so that means that you should save the money for your down payment in a simple savings account.
I recommend an online bank like Capital One 360 where you can open separate savings accounts for your various financial goals. Learn how to save for large purchases and expenses (and why you need to!) here.
On the other hand, if you know that your timeframe is more like 6 to 10 years (or longer) before you wil likely buy your home, then you can look at investing the money (learn how to start investing here) in good mutual funds instead of simply saving it in a bank savings account. That is what we are doing to save for our next home, which will probably be worth 1.5 to 2 times the value of this one and which we plan to buy in 5 to 8 years for cash. (Learn more here about my favorite way to buy a house—the 100 percent down plan!) We have investment accounts through both Charles Schwab and Vanguard.
Both are excellent companies with great customer service and very low fees. And you can transfer money, for free, easily from your checking account to either of these two brokerage firms.
Want to learn how to set up an account and start investing in good growth-stock mutual funds? Fill in the information below to receive my free investing cheat sheet!
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4. Figure out how much you can comfortably afford to pay for your home purchase.
Another important tip related to how to save for a house is that you be careful to not buy a house that is too expensive that will leave you house poor, you need to be realistic about what you can truly afford.
I know it’s not that common, but try to save up a 20 percent down payment so that you can save a bunch of money on interest during the life of the loan and so that you can avoid having to pay private mortgage insurance (which is where you pay a monthly fee because a lender was willing to take on more risk by allowing you to purchase a home with a smaller down payment). If you feel a 20 percent down payment isn’t realistic, try to save up at least 10 percent.
I know that saving up a substantial down payment takes more time and discipline than having a smaller down payment, but there are things you can do to reduce your current housing expenses, food expenses, utility bill, transportation expenses, cell phone bill, entertainment spending, and more so that you can make this a reality. And you can also work to boost your income as you save up for your home in order to reach more quickly your goal of home ownership.
Keep your estimated mortgage payment (including principal, interest, taxes, and insurance, or PITI) to no more than 25 percent of your take-home pay. (If you tithe or if you give a large amount to charity, deduct this amount from your take-home pay, as well, before doing your calculations so you’re budget will be less stretched.) That way, you will avoid buying a house that you cannot truly afford and that will keep you from having financial peace and reaching other awesome financial goals like saving for a comfortable retirement and helping to pay for your children’s college expenses so that they can avoid the awful burden of student loan debt.
5. Plan for maintenance expenses.
Then make sure you also include in your monthly budget a reasonable amount that you can save each month for needed maintenance and repairs on your home. Financial experts recommend that you save at least 1 percent of the purchase price of your home each year for these maintenance-related expenses. So if you’re looking to buy a $200,000 home, you should plan to save at least $150 a month for maintenance and repairs. Again, put this money in a separate savings account so that you won’t be tempted to spend or accidentally spend it on something else.
6. Choose a 15-year mortgage over a 30-year mortgage.
I strongly recommend that you take out no more than a 15-year mortgage. By sticking with a 15-year or less mortgage, you’ll save a ton of money on interest, not just because of the decade and a half that you’ll save in making payments (the vast majority of which in the early years goes to interest, thanks to front-end-loaded amortization [front-end loading the amount of interest you pay on your loan]—yikes!) but because you’ll also pay a lower interest rate because the bank is taking on less risk.
So, for example, if you take out a $200,000 15-year mortgage in today’s market (at about a 4 percent interest rate), you’ll pay about $1,471 a month on principal and interest. And you’ll pay $66,287.64 during those 15 years on interest. (That’s a lot of interest!) But if you instead get a 30-year mortgage at a 4.5 percent interest rate, you’ll pay $1,013 a month in principal and interest, so your payment won’t be as high, but you’ll pay an insane $164,813.42 in interest over the life of the loan. That’s getting close to the amount you paid for the house itself. Not cool! Just take a 30-year mortgage off the table. That’s what normal people do who are OK staying in debt for literally the rest of their lives. But you are not normal. You are on your way to being a financial rock star.
So, let’s look at a hypothetical situation. If you make a combined household income of $4,500 a month after taxes and taking out money for tithing or charitable giving (and after taking out money for health insurance premiums or other monthly expenses you have if they’re substantial), then your maximum monthly payment should be $1,125 a month. But then make sure to run the numbers so that you know that you can also save an additional $125 or more a month toward maintenance and repair costs.
And also don’t forget that your monthly utility bill will likely be higher, and you may have other fees such as homeowners association dues. Be sure to consider all of these expenses when you are working toward buying your home so that you don’t get taken by surprise and so that you, again, don’t buy more house than you can comfortably afford.
7. Research the neighborhoods you want to live in.
Next, start looking at the areas where you would like to live (that you can afford). If you find that the neighborhoods you can afford aren’t the ideal neighborhood you would like to live in, see where you might compromise on your wish list. For example, maybe if you reduce the square footage or the number of bedrooms or bathrooms, you can still be in one of the neighborhoods you prefer. Or maybe you could look a mile or two over, and still be in a pretty good neighborhood.
When my husband and I bought our current home, we wanted to have a good-sized lot and we (or really I :)) wanted to be very close to my work, and we wanted to have a mortgage that we could comfortably afford on one income, following the guidelines outlined above. So we decided to live in not as nice a neighborhood as we would have preferred (but still safe). But we also have a big dog and we got an awesome, inexpensive alarm system (check out SimpliSafe; they have been great, and we pay only $15 per month!) that doesn’t require a landline or contract, and we’ve never had any problems with vandals or break-ins. So for us, the compromise was worth it.
8. Budget for other expenses related to buying and owning a home.
Another important thing to remember as you consider how to save for a house is to remember to save for expenses and purchases related to moving into your new home.
If you’ve always lived in a furnished apartment, the expenses related to purchasing a home might come as a bit of a shock. Many items are not included with a typical home purchase, such as furniture and many of the standard appliances. Depending on your willingness to buy used or less-expensive furniture and appliances, you may need to spend several hundred or even several thousand dollars after you move into your new home in order to furnish it. You may very well need everything from curtains and blinds to washer and dryer to beds and linens and dressers to couch and loveseat to towels and knickknacks for the spare bathroom. Do your best to estimate how much the items you will need to buy will cost, and start saving for them as you are saving for your down payment.
9. Have enough money saved to cover unexpected expenses after you move in.
Even with planning for the known expenses of moving into your first home, there are probably going to be some things you can’t plan for. Even if you have a home inspection done (which you definitely should do!), it won’t be able to tell you everything about your new abode. Of course your emergency fund can cover these unexpected expenses, but personally, I do not like to have to pull money from my emergency fund—I would rather have additional money set aside so that I don’t ever have to touch my emergency fund.
If you can save an additional $1,000 above the cost of your down payment and the money to buy your needed furniture and appliances, you will be able to cover the majority of unexpected expenses that might come up.
10. Think about your future income and circumstances.
So many people buy a house based on their current situation, but they don’t think about how their circumstances might change in 3 or 5 or 10 years. For example, I know of a few different situations where a young couple bought a home shortly after marriage, when both spouses were working. And they qualified for a mortgage based on their combined incomes. But then when they decided they were ready to have children, the mother either stayed working when she wished she could be at home, or she quit her job, and things were extremely tight financially.
If you know that you are going to want one of the parents to be able to stay home and to be a single income family at least for a time, then plan for that by purchasing a less-expensive home. Or if you know you want one of you to be able to work only part-time, then plan for that.
When we bought our first home and then also with our second home, even though my husband was working part-time and going to school, we bought them solely based on my income because we knew that we wanted one of us to be able to stay home to be with our children (and he just got to be the lucky—blessed—one to be able to do it!).
11. Plan to buy something you can stay in for at least 5 to 10 years (and longer is even better!).
In order for you to really benefit financially from your home purchase, you need to build up a decent amount of equity that you can use as a good-sized down payment for your next home. This is particularly important if you’ll want to upgrade a little when you make your move.
When you buy a home, you typically pay several thousand dollars in upfront closing costs, so between that and the very small amount of money that goes toward principal in the early years (remember amortization, that I mentioned above), you really don’t build up much equity in the early years of your mortgage.
But the longer you stay, the more principal you pay down, and the more money you’ll have when you are ready to sell (assuming home values have generally risen during the time you own the home).
So if you know that you want to have children in a few years, for example, don’t buy a one-bedroom (and maybe not even a two-bedroom) townhouse. Buy something reasonably priced that you could stay in for 10 or 15 years or longer, in case that ends up being what makes the most financial sense or the most sense for your family. Be patient, and wait to buy a home till you can afford something that you would feel good about staying in for 5 to 10 years at least—and the longer the better.
Don’t listen to the hype that you’ve got to buy a house right now—got to buy a house, got to buy a house! There are houses on every corner, and they will be there in three or five or ten years when you are ready to buy. When you are ready to buy—not when everyone else tells you you should buy.
12. Know what you’ll be getting yourself into financially.
Also as you are planning how to save for a house, keep in mind that the purchase of the home is just the beginning of your home-related expenses.
As I mentioned briefly above, do your homework so that you know what expenses and costs to expect when you buy your home and also as a new homeowner. Make sure you understand the different closing costs and interest rates and the expenses you’ll need to be prepared to pay when you make your first home purchase.
For example, as a new homeowner, in addition to needing to pay maintenance and repair costs for your home and also for appliances and furnishings, you also might have homeowners association (HOA) or other fees, and you’ll have property taxes and homeowners insurance. So make sure you’re familiar with all of these expenses and that you know about how much they’re going to cost you every month or year so that you can budget accordingly.
Learn how to create a simple budget (that will actually work!) here.
13. Trim your other expenses as you work to save up to buy your first home.
As you save up the down payment for your home, rent as cheaply as you can and also cut expenses in other areas. For example, you could reduce your spending on your groceries, eating out, entertainment, your cell phones, your utilities, and more.
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I hope you have the information you need now about how to save for a house and that you feel confident and ready to start saving for your first home purchase.
Saving up for and buying your first home is an amazing accomplishment! This is a very exciting time in your life! As you can see from the list above, there’s a lot that goes into this very important financial move (no pun intended! :)). There are many cases where spending the money to buy a home is well worth it.
Just make sure you know as much as you can about what you are getting yourself into—and don’t buy before you are financially ready to, no matter what outside forces you may be feeling to buy as soon as possible.
As you consider making your first home purchase, remember these important items: do your homework, make sure you have an emergency fund in place, think about your likely future circumstances and plan accordingly, don’t get a mortgage that is more than 25 percent of your take-home pay (and preferably the take-home pay of only one of the spouses), don’t get buyer’s fever and overspend your budgeted amount, and don’t forget to budget for the expenses related to purchasing a new home (such as buying furniture and paying for routine maintenance work to be done) and for unexpected expenses that might arise.
Do you have any questions questions about how to save for a house? Which of these tips on how to save for a house do you think will be most helpful to you? Leave a comment below and let me know!
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