April 20th, 2017 5:37 AM by Jackie A. Graves, President
Don't buy a home until you've
considered these factors
For many, buying
a home is the
realization of the American Dream.
But it's also a huge
financial undertaking, one not everyone is ready for.
How do you determine
much you need to save to
be able to afford to buy a house?
First, start by figuring
out where and how you want to live. The more you can flesh your ideal area, the
better. Eric Roberge, CFP and founder of Beyond Your Hammock,
recommends asking yourself the following four questions:
Do I want to live in
an urban or rural neighborhood?
Would I be okay with
neighbors in my building or do I want a standalone house?
Do I care how long
my commute is?
Do I want to drive,
ride the train or walk to my normal destinations?
will help you narrow down the areas that fit with your vision," he tells
How much more it
costs to own vs. rent in your state
Next, figure out how
much home you can afford, based on your current income, expenses
goals. Keep in mind that just because you can afford a bigger space doesn't
mean you necessarily need one.
researching the average price of a home in your dream neighborhood and taking
20% of that number: that equals your hypothetical down payment. How many months
would it take you to save up that amount?
"Although you do
not have to put 20% down on a home, this will give you a framework to help you
decide if it's possible to own a home in that neighborhood," Roberge says.
To truly afford a house,
you need more than just a down payment saved up. Ultimately, you'll want to be
able to comfortably cover six factors: the down payment, closing costs, moving
expenses, repairs and maintenance, the first few months' mortgage payments and
your emergency fund.
making a big mistake by not owning their homes, says one financial
Let's break down what
The down payment can
range from 3.5% to 20% of the total cost of the home, depending
on your credit
score, mortgage interest rate, and current financial situation. Cathy Derus,
CPA and founder of Brightwater Financial,
recommends putting down closer to 20%,
however, because it gives you a bigger
stake in the property right away.
"You're going to be
lowering your monthly payment in the future, and you also have a buffer,"
she tells CNBC. "If housing prices decrease and you need to sell your
home, you're not going to be as much underwater if you have more of that equity
in the home up front."
Closing costs, including
inspection fees, property taxes and prepaid interest, will typically tack
two-to=five percent of the total cost of the home onto the final price.
Don't overlook the money
it will take to make your new house a home. In addition to physically getting
your stuff there, immediate expenses crop up. Do you need new furniture to fill
a larger space? Do you want to decorate as soon as you move in?
"Unless your home
is brand new, there could be things that you'll need to upgrade or add,"
Roberge says. "It's human nature to want to make the home feel, well
comfortable, so people often end up buying furniture after they
Will you be able to
comfortably keep up with your mortgage in the first few months after purchase?
Some lenders require additional cash reserves to prove that you're able to make
payments, Derus says. But even if it's not required, it's smart to know that you're
"What's to say that
a week after closing, the company you work for goes bankrupt and you lose your
job, or something like that?" Derus says. "You want to make sure that
you have additional money set aside, just in case something happens."
You should include taxes
and insurance payments in this category as well.
Repairs and maintenance
Chances are, your house
won't be perfect on move-in day. Whether it's adding a fence or
getting rid of
that garish yellow paint in the living room, you'll want to have cash ready for
repairs and maintenance.
homeowners should expect to pay 10% to 20% of the price of the home
according to Derus. That covers expected costs, such as mortgage payments,
insurance, utility bills and taxes, and also maintenance costs.
Plan to have a savings
cushion for irregular expenses, too, such as replacing a leaky roof
installing a security system.
Buying a home typically
signifies that you've reached a major savings goal, so it's normal to see your
accounts drain. But you should still have a separate emergency fund stocked
with three to six months' worth of living expenses.
If closing on your house
means emptying out your entire savings account, you might want to rethink
whether you can truly afford a home right now.
habits that will help you build wealth in 2017
All of these factors
added together will allow you to calculate a ballpark figure for how much
you'll need saved up to be able to afford a house. Keep in mind that you don't
want this number to exceed 25% to 30% of your income for the year, Derus says.
But if you do the math
and would be barely able to scrape by, consider holding off until you're in a
more stable financial position.
"If your top
priority [for buying a home] is 'because it's a good investment, I'm wasting my
money on rent, or because it's just that time in my life when I need to grow
up,' run fast the other way," Roberge says. "Those are emotional
decisions, not financially responsible ones."
Remember, planning for
the future is important. Before making any major purchases, always take stock of
your individual situation and do what works for you and your family.
"Being smart with
your money can look like living in an affordable rental and continuing to save
and invest for future goals," Roberge says. "Breaking even or overspending is not a viable
solution for anyone."
The income you
need to afford a home in the biggest U.S. cities
By Emmie Martin - To view the original article click here