By FPA Member Eric Toya, CFP®
Last Updated: May 7, 2012
Are you saving up to buy your first house? A traditional mortgage typically requires that you make a down payment of 20% of the purchase price. Even after the bursting of the housing bubble, there are options to purchase a house with as little as three percent or even zero down. Generally, placing less than 20% down will increase your costs in a handful of ways including higher interest rates, private mortgage insurance and, of course, a larger mortgage payment.
In order to keep your costs as manageable as possible, it is generally recommended that you make a 20% down payment. However, managing to save 20% may seem daunting. If you are planning to buy a house for $250,000, that’s $50,000 that you will need to save.
You should start by calculating how much your expenses will be after you purchase the house. Many first time home buyers are surprised at all of the expenses that accompany the house. Of course, you will have a mortgage payment, which may be more than your rent. Don’t forget property taxes which average 1.38% nationwide.1 On that same $250,000 house, that’s another $3,450 per year that you will have to budget, or $287.50 per month. Check with your local county to find out rates in your area. Common expenses also include homeowners insurance and routine maintenance. If you are buying a condominium, townhouse or a home in a planned community, you will likely have homeowners association dues. Also, consider how much you may wish to upgrade or beautify the property.
Home ownership comes with some tax benefits, but don’t count on those tax deductions to offset the increase in your housing budget. Many families who were using the standard deduction prior to buying a house find that deducting their mortgage does not reduce their taxes as much as they thought.
Now that you have calculated how much your monthly housing costs are going to increase, you should begin to set aside that additional amount. This is a double win in that it will force you to live on the same budget as you will have after you buy the house while also forcing you to increase your savings. You will also learn if you are ready for the change in your budget that buying a house will bring. If you find that you have difficulty living on this tighter budget, you may need to rethink if you are ready to buy a house or consider a less expensive house.
Buying your first house is a major accomplishment. Make sure you are prepared so that your American dream does not turn into a nightmare.