At some point you might find yourself in a position where you’re not quite ready to purchase a home, but you know that you’d like to in the future. If this describes your situation, you may want to start thinking about establishing a dedicated savings account
where you can put away some extra money on a regular basis. This “house fund” will come in handy when you’re ready to start the home buying process.
Even if you don’t yet know where or when you’d like to buy a home, it is never too early to start working towards your financial goal. Buying a home will likely be one of the largest purchases you’ll make in your lifetime. Here are some home buying costs to consider and tips to start saving.
Costs to Be Aware of
If you are a first-time home buyer
, you may not be aware of some of the costs associated with the home buying process, or the expenses involved with owning a home. Besides the home’s selling price and the interest you’ll pay with a mortgage, you should also consider the following:
• Closing Costs. Closing costs
can range from 2% to 5% of a home’s total purchase price. They will vary depending on which state you’re buying in, the type of loan you take out, and the mortgage lender you choose. Unfortunately for home buyers in Massachusetts and Rhode Island, the Northeast has been found to have some of the highest average
closing costs in the United States. Closing costs often include expenses such as loan origination fees, home appraisal fees, recording fees, and title search fees.
• Homeowners Insurance.
Before your mortgage is approved, your lender will require you to obtain homeowners insurance. This protects the lender’s investment until you pay off the loan. In many cases, you’ll need to pay for the cost of insurance upfront, either as a lump sum each year, or by paying into an escrow account on a monthly basis so the mortgage servicer can pay the policy on your behalf when it comes due.
If your down payment
is less than 20%, most lenders will also require you to take out Private Mortgage Insurance (PMI)
. Annual PMI costs are typically between 0.5% and 1%
of your mortgage, and are paid monthly as part of your mortgage payment.
• Property taxes.
Property tax bills are often overlooked
by first-time home buyers when they’re determining how much home they can afford
. Be careful not to make this mistake. Property taxes are paid annually and the amount will vary based on the tax rate in the town or city your home is located, as well as the assessed value of your home. The higher the tax rate, and the higher your home’s assessed value, the more you’ll pay. Because of this, it’s important to understand the property tax rates in the areas you’re considering buying a home. It’s also important to keep in mind that your property taxes can fluctuate year-to-year
. For this reason, you’ll want to leave some wiggle room in your budget so that you will still be able to make your monthly mortgage payments if they increase due to property tax hikes.
• Moving costs.
Even if you are not moving far away, you may find it necessary to hire a professional to move large items like furniture. If so, this is a cost you’ll need to factor in. Luckily, you should be able to shop around to find the best deal for your budget.
• Furniture costs.
If it’s your first time buying a home, you’ll also want to consider the cost involved with furnishing it. Even existing home owners may find themselves needing to buy new furniture when they move. Maybe your existing stools are counter height and your new kitchen needs bar height. Or perhaps your current dining room table doesn’t fit your new space, or you have more to bedrooms to furnish than you did at your old house. No matter what your situation, you should consider furniture costs when budgeting for a new home.
Start Saving Now
Although some mortgages require little or no down payment
, most traditional mortgages require you to put down at least 20% of the purchase price. This allows you to avoid additional PMI costs
. Every dollar you can avoid in PMI, is another dollar you can put towards paying down your mortgage
While putting down a sufficient down payment to avoid PMI is a smart financial move, it can be easier said than done. According to the Federal Reserve Bank, the median sale price
of a home in the U.S. was $347,500 in the first quarter of 2021. Using this figure, a 20% down payment would equate to nearly $70,000. Given that the median household income was $68,700 in 2020
, saving enough for a down payment can seem unsurmountable for many people. However, the sooner you start saving, the sooner you can make your dreams of home ownership a reality, regardless of how much money you end up putting down once you’re ready to buy.
Here are some tips to help you save for a down payment, as well as your other home-related costs:
• Open a separate account.
Opening a dedicated savings account
for your home ownership goal can help you avoid the temptation to take money out of it. By keeping your “house fund” separate from your other bank accounts, you’ll have no reason to tap into it for ordinary expenses. If you decide to go this route, you should look around for an account that offers high-interest
. This will help you grow your money
• Set up direct deposit.
By automatically earmarking a portion of your paychecks to go directly into a savings account, you can resist the temptation to spend the money, and keep funds flowing into your account on a regular basis. Most people are familiar with setting up direct deposit to have all of their paycheck go into a designated checking account, but many don’t realize that you can typically work with your employer to split your direct deposit into multiple accounts
, including a savings account. This can be an easy “invisible” way to save. Since the money moves automatically from your paycheck into your savings account, you won’t see it, and will be less inclined to miss it.
• Save any extra money.
If you receive cash gifts, get a bonus or large commission check, or if you get an income tax refund, put it towards your home savings. Any extra funds you can stash away from time to time will help you reach your savings goals faster.
• Cut back on expenses.
By reducing your monthly expenses
, you can free up additional extra discretionary funds, and have more money to contribute to savings. If you’re having trouble finding ways to cut back on your spending, examine your budget for small expenses that could be adding up over time
, or for recurring subscriptions
you could cancel. Analyze where your money is going and use a budget
to see if you’re currently overspending in certain areas.
• Save less in other areas.
If you are currently putting money towards a retirement fund, your child’s college fund, or if you’re saving for another large expense like a vacation, you may want to take some time to prioritize your various savings goals. If buying a home is a more immediate need than your other objectives, you might consider temporarily reducing the amount you regularly set aside for your other goals, until you save enough to buy a home. While this can be a potential way to save for a home faster, it’s always a good idea to first consult with a tax professional or financial planner to ensure you’re making the right move for your own financial situation. A financial expert can also help to ensure that you fully understand any potential tax implications before making a major change to your saving or investment strategies.
Buying a home can oftentimes seem out of reach due to its enormous price tag. However, if you understand the costs involved, put together a savings plan and budget, and stick to it, you can be well on your way to realizing your dream of home ownership. BankFive is committed to helping you buy a home, and reach your other financial goals. If you’re interested in buying a home in MA or RI, open a savings account
online today, or contact us
to start a conversation about the mortgage application
process. We’re here to help!