It’s no secret that nobody likes debt. But with car loans, credit card debt and student loans making it harder to get the cash needed to invest and even save, it requires smart planning to achieve major financial goals like buying a home. Perhaps one of the biggest initial costs of purchasing a home is paying for the down payment. How much should you save?
That’s the main question for most would-be homeowners. Don’t worry. You won’t need anything close to one million dollars to be on the right track to buying a home. However, you need to work through the process of determining the amount you need to save to give you a headstart. Here’s what you need to do:
Know How Much You Can Afford Each Month
When it comes to buying a home, you should never spend more than 25% of your monthly take-home pay on your mortgage payment. If you go beyond that, you leave yourself unprepared to deal with emergencies or take advantage of opportunities that may come up. Affordability is key considering that buying a home is most likely the largest long-term investment you’ll ever make. You don’t want to find yourself struggling down the line.
While there are other more flexible financing options like USDA loans aimed at helping homebuyers who want to purchase homes in rural developments, it’s always important to know what you’re getting into, according to OnQ Financial. Write down how much money you (and your spouse if applicable) make each month and multiply it by .25 to find your monthly mortgage amount. This amount includes insurance, taxes, homeowners association fees and escrow.
Calculate Your Total Mortgage Amount
Use your monthly mortgage payment amount to arrive at a total mortgage amount at the end of the loan period. Whatever type of mortgage you select for your home buying dreams, experts recommend that you go for a shorter-term loan with a fixed rate, which will definitely save you thousands of dollars when compared with the more traditional 30-year mortgage option.
Consider spending some time on a mortgage calculator online, and enter different numbers in the provided down payment and home value options section with the ultimate goal of hitting your targeted total monthly payment. Make sure to consider your monthly income and the 25% rule. Take note of your affordable options and talk things over with your spouse before deciding.
Aim for Between 10-20% of Your Down Payment
If you haven’t yet decided on how much you’ll have to save for down payment, it’s time to determine the amount that works best for your family. Ideally, it’s best to choose a 20% down payment, which can significantly lower your mortgage interest rate, open you up for a 15-year mortgage and also help you avoid paying Private Mortgage Insurance (PMI).
You’ll need to do your math carefully. Say you’re planning on buying a $145,000 home. That means you’ll need to save up $29,000 for a down payment. Just multiply your total mortgage amount by the percentage you plan to put toward the purchase of your dream home and you’ll get the amount you need to save. Real estate experts offer some practical saving tips.
What Other Costs Should You Consider?
There are other costs associated with buying a home. Knowing them ahead of time can save you a great deal of stress. These costs include:
- Private Mortgage Insurance – This is added to your monthly mortgage payment if you put down less than 20% down payment.
- Home appraisal and inspection fees – For your mortgage lender to sign off your loan, you’ll need to have your dream home inspected and appraised. Each of these may cost you an average of $300.
- Closing costs – Plenty of work goes into signing your home purchase agreement. Unless the seller decides to cover the closing costs, expect to pay anywhere between 2% and 5% of the total mortgage value.
The Bottomline
Understanding how much you should save for down payment will help you plan more wisely for your home purchase. Tackle this first and get your timing right and you’re ready to buy a home.