Buying a house is an important milestone, but it can also be a frightening experience. The fear of not having enough money to complete the purchase or of running into trouble after the mortgage is in process can be enough to scare most new buyers into a state of paralysis.
The key to saving enough money for a first home is to pay attention to all the factors. Take a look at the following tips for some guidance on how much a new home buyer should save before getting a mortgage.
Save for a Sizable Down Payment
The first thing new home buyers think of when they are trying to figure out how much money they need to save for a house is the down payment and rightly so. Lenders require mortgage applicants to come up with approximately 20% of the purchase price of the home to secure the best possible mortgage terms. Of course, this is not to say that less of a down payment will mean home buyers will be unable to find financing, but those with fewer funds will have to sacrifice in other areas and may end up paying higher interest rates.
Remember to Cover Closing Costs
One of the things new home buyers often forget is the cost of closing. This can easily add up to a few thousand dollars depending on the price range of the house. Closing costs include loan origination fees, title search fees, and home owner’s insurance fees and so on. These costs usually add up to approximately 5% of the purchase price of the house, so the more expensive the house the higher the cost of closing. It is important to remember to add this amount to the liquid cash figure needed before finalizing the sale.
Factor in the Mortgage Term
Mortgage terms range from 15 to 30 years but a shorter mortgage is more favorable in general terms because it means that the interest cost will be spread over a shorter amortization period and will therefore be much less than the longer term mortgage. New home buyers don’t often relate this factor to how much they need to save because the decision usually comes up only during a mortgage interview, after most of the saving is already done. However, the more money a home buyer can put down upfront the better the chances of securing a 15 year mortgage, which can shave an outrageous amount off the interest payments over the life of the loan.
Think of Your Personal Preferences
Buying a house involves many personal decisions. Whether to search in the city or suburbs, how many bedrooms and even the condition of the home from ‘move-in ready’ to ‘fixer-upper’, all impact the final cost of the home. The purchase price is essentially the biggest indicator of how much a home buyer needs to save, but it is influenced by all of these smaller considerations.
Having an emergency fund is not a requirement of securing mortgage financing, but it can certainly impact on the ability to repay the loan in times of unexpected crisis. Home ownership also brings with it new expenses such as maintenance which may be significant depending on the condition of the home.
All these factors combined influence how much should be saved before buying a house. The figure derived from using this equation may be much higher than new home buyers originally estimate, but the road ahead will be a lot smoother if these costs are faced head on.