How to Start Saving for a New Home
Deciding to buy a house is a major decision, and it’s one that you shouldn’t rush into. Purchasing (and owning) a house requires a certain level of fiscal responsibility and management skills. If budgeting is difficult and extra spending seems to get the better of you more often than not, it may not be the right time to think of home ownership.
If, however, you’re used to carefully managing your finances and know you have the resolve to make substantial tradeoffs and cutbacks, you might just be ready. We’ve put together some basic home-buying information that you should know when looking for your first house.
Before you start searching for that perfect house, you’ll need to nail down some concrete numbers. You don’t want to find your dream house, only to realize that it’s way out of your price range! To make the actual purchase on a house, you’ll usually need to make a first-time buyer deposit and take out a mortgage to pay off the rest of the cost over a set number of years. Most mortgages have a 30-year loan term.
The easiest and most accurate way to determine your house-hunting budget is to get prequalified at your bank or through a third-party lending company. Doing so will give you a solid price, based on your annual salary and current credit score. You can still get an estimate on what you can afford from third party real estate sites, but be careful — the results you get are only general estimates that contain a lot of leeway.
Your credit score has a major impact on your mortgage interest rate. In fact, a good credit score can save you thousands of dollars or more when compared to a poor credit score with the same down payment. We’ll use a FICO Loan Savings Calculator with a sample 30-year fixed mortgage at the national-average rate with a $200,000 loan principal to illustrate just how much you can save.
| Credit Score | Interest Rate | Monthly Payment | Total Interest You’ll Pay |
| 760 to 850 | 2.83 percent | $825 | $96,917 |
| 700 to 759 | 3.05 percent | $849 | $105,500 |
| 680 to 699 | 3.23 percent | $868 | $112,440 |
| 660 to 679 | 3.44 percent | $892 | $120,946 |
| 640 to 659 | 3.87 percent | $940 | $138,406 |
| 620 to 639 | 4.42 percent | $1,004 | $161,271 |
*The above rates are estimates only; actual interest will vary based on additional factors such as your loan type, location, down payment and more.
Keep in mind that, depending on the type of mortgage you have, your interest rate may change if your credit score goes up or down. You’ll need to maintain a good credit score during the life of your loan, otherwise you may increase your interest rate.
The down payment is one of the most important financial aspects of home buying. Once you have determined your overall house budget, you’ll need to calculate the amount you’ll need for this deposit.
A first-time buyer deposit is usually anywhere from 3 – 20 percent of the total cost of the house. Twenty percent has long been the benchmark number, but statistics show that the average down payment for first-time homebuyers is roughly six percent.1 Depending on your deposit percentage and/or loan, you may also have to pay for mortgage insurance, which may end up costing you more in the long run. However, first-time homebuyers may also qualify for additional loan assistance, tax breaks or other programs, depending on your situation.
Before you start saving for your first-time buyer deposit, you’ll need to know what kind of a mortgage you can get. Once you know how much your mortgage will cover, you’ll be able to better decide what percentage of a deposit you can handle.
It’s best to schedule an appointment with a mortgage lender, who will calculate what kind and how much of a mortgage you qualify for. There are some basic formulas you can use on your own beforehand to give you a rough idea of what you’ll need to be saving per month.
Experts suggest keeping your housing expenses at 28 percent or less of your monthly income. For example, if your monthly salary is $3,000:
.28 x 3,000 = $840
Therefore, $840 is roughly the amount you have in your budget for monthly mortgage payments. This money will go towards things like:
- Mortgage principal
- Interest
- Property taxes
- Homeowners insurance
- Mortgage insurance, if applicable
- Homeowners Association fees (HOA), if applicable
Saving thousands of dollars a year for a 20 percent down payment, or even a lesser percentage, may require some serious lifestyle cutbacks. It’s a large sum of cash to save up! You’ll probably be looking at needing hundreds of extra dollars in your monthly budget in order to meet your savings requirements.
Beyond your deposit and monthly mortgage, you’ll should also keep in mind that you’ll need a cash reserve for closing costs and other expenses. These fees will vary widely based on factors like your housing situation, location and lender, but can include things like application or inspection fees, bank transfers, initial taxes or other incidental costs. Closing costs can run anywhere from 2 – 5 percent of your total loan amount. For example, if you have a $150,000 mortgage, you’ll need to save an extra $3,500 – $8,750 for closing costs alone.
Other expenses, like prepaid expenses and utility expenses, may be part of the overall closing costs, but they can sometimes be separate, additional costs. And depending on your mortgage lender, you may be required to have a cash reserve, which requires you have a set amount of cash left over after the actual purchase. It’s the lender’s way of making sure you have enough money to make your initial mortgage payments and don’t immediately default on the loan.
Regardless of your dream home, you need to ensure you have some flexibility in your budget. Financial emergencies and surprises are bound to pop up from time to time. Maybe your car breaks down or your hot water heater stops working. Just because you’re saving for your deposit doesn’t mean that you can afford to wait on the essentials!
You should also consider future expenses that you know will happen, such as car and appliance repairs or replacements. Consider opening separate savings accounts if it’s difficult to keep all these separate savings goals and amounts clear. Designate one savings account specifically for your down payment fund and another for emergency and future expenses to keep everything in order. It’ll save you time and stress since you’ll know exactly what and where your savings amounts currently stand.
References:
1Warden, P. (2020). The average down payment on a house, and when to put down more or less.
The information in this article is provided for educational and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial, legal or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.
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