Yesterday’s post looked at how to save money for a house, but didn’t touch on what your actual target should be. Today, I’m going to cover the back end of things–how much money you’ll need to buy a house.
Go ahead—marvel at the impossibility of actually answering the question correctly. That’s okay, we’re going to try anyway.
Deposits, down payments, fees, and the rest of the lot vary from locality to locality, and as a result of purchase price, financing type, bank, and about 100 other variables. Generally speaking though, you can expect to save for some of the same things we are, which are:
- Down payment amount. Usually varies from 3% to 20% of the sales price, depending on financing type, credit, and other factors.
- Application and related fees. Includes fees to apply for a mortgage, put down deposits on homes we like, and inspect homes (potentially with some bad results). $1,000-$2,000 should do the trick.
- Closing costs. A general term that covers everything from doc stamps to survey fees, bank fees, research, title insurance, inspections, and other items. Your realtor is a good source for an estimate, which we put at 3-5% of the purchase price.
- Points. If you’re planning to pay points to lower your interest rate, that will take some up-front cash. The most points you want, the more cash you’ll need.
- Escrow items. Insurance and tax costs are often held in escrow by the bank throughout the year and have to be pre-paid for 3-12 months at closing. Again, this varies based on location and price, among other things.
- Reserves. Many banks will ask to see that you have at least a few months of mortgage payments sitting in the bank. You won’t have to “spend” this at closing, but it needs to be saved up just the same.
- Moving costs. Most of my moves have been within 10 miles of my last home, but there were always moving expenses involved.
- Initial repair/maintenance costs. Even a seemingly perfect house will start showing its age after move-in, and that’s a bad time to be short on cash.
Whew–I think I got it all. With a list like that, it’s no wonder people give up, frustrated and bitter. But not to worry—if you missed yesterday’s post, read about how to save money for a house and get started today!
Example: A $100,000 Home
Let’s go through a quick example and put pen to paper. For simplicity’s sake, let’s assume I’d like to buy a house for $100,000, and that with my credit history, I’ll be putting 10% down. Here’s my estimate for what I will need:
- Down payment: $10,000 (10% of sale price)
- Application fees: $1,500 (estimate)
- Closing costs: $4,000 (4% of sale price)
- Points: $0 (not planning on adding points)
- Escrow pre-pay: $3,000 (taxes and insurance are both high in my area)
- Reserves: $3,000 (about 3 months of payments)
- Moving costs: $500 (we’re not moving far)
- Initial repair/maintenance: $5,000 (comfortable amount)
Total damage? $24,000, or nearly 25% of the purchase price! This demonstrates that while most people tend to focus strictly on saving for the down payment, it’s everything else that can really drive up the cost of a home purchase.
The costs are not perfectly linear as the price of a house goes up, but they’re close enough! With a few exceptions like the application and moving costs, all of the expenses will increase as a house gets larger and more costly.
If you’re thinking about saving for a home, take a minute to calculate your probable cash needs and take steps to figure out how you’ll get there.