At some point in your life, you turn your financial attention to buying a home. While saving for a new home may seem like an insurmountable challenge, you can handle the typically steep curve of down payments and closing costs much easier if you know what figures come into play when buying a home. In this article, you will discover how much you need to prepare before you make the single biggest transaction of your life!
How much do you need to save for the down payment?
When it comes to saving for your future home, take note of the rules of thumb. The estimates I will provide in this article will give some guidance on how much you will need to save up to buy a home for the first time, but take note that these are only estimates so it’s better if you save more.
If you ask a real estate expert how much you need to have saved to buy a new home,he or she will likely tell you to save at least 5% of the cost of your dream house. This 5% will be used towards your down payment if you are qualified for an FHA loan.
As you save for your down payment, remember that this 5% estimate is only a minimum and expectations differ by community. For instance, if you buy a home in Portland, Oregon, you will find that minimum down payments are usually at 20% of the total cost of the home. Even if you are able to secure a mortgage by putting down less than this required percentage of the selling price, you still are almost certainly triggering mandatory mortgage insurance as a consequence.
Generally, homebuyers who pay less than 20% in down payment are required to pay mortgage insurance until their loan-to-value ratio is 80%. That means if you borrowed $270,000 on a $300,000 home, your LTV ratio will be 90%. As a result, your monthly payments on that policy will continue until you have finally paid your mortgage down by another $30,000 to a balance of $240,000, which is 80% of the total selling price of your future home.
It’s a different story for mortgage insurance premiums. Unlike mortgage insurance, the amount of your mortgage insurance premium heavily depends on your credit score and the size of your down payment. While there is no specific amount required for mortgage insurance premiums, when it comes to private loans, these run within the 0.3%-1.15% range.
Taking that into account, if you are a homebuyer who has an excellent credit profile and you go for a 30-year-mortgage, then you will have to take on an estimate of $1,762 monthly payments if you use your initial savings of $30,000 or 10% as the down payment for a $300,000 home.
If your savings amount to $60,000 and is therefore enough to cover 20% of the $300,000-worth home as down payment, then your monthly bill will go down to about $1,600 because this will eliminate the need for mortgage insurance. That means if you’re buying a home and savings are an issue for you, you might have no other choice but to take on the insurance in exchange for a lower down payment.
How much will you need for closing costs?
In real estate, closing costs refer to the costs covering the fees for agent commissions, appraisals, surveying, inspections and certifications, tax and title services, government record changes, and transfer taxes. Also included in these costs is the amount you pay to your mortgage lender.
Depending on the neighborhood you choose, other factors come into play when we talk about closing costs. For example, in a major city cooperative, you may be required to have a year or more of maintenance fees in the bank. You also cannot forget about your move—which is the tail end of your home buying experience.
Closing costs range from 3% to 6% of the selling price of a home. That means that if you are buying a $300,000 worth of home, you should be able to sock away at least $6,000 to $7,500 to cover the back end of your home buying experience.
When you think about closing costs, remember these two things:
· Closing costs vary from one state to another. States have different real estate transfer tax and/ or mortgage stamps. These taxes refer to the government taxes collected based on a percentage of your mortgage loan amount and can vary based on various rates charged for attorneys, appraisals, and title insurance.
· Closing costs must be outlined by your lender. Your lender is required to outline your closing costs in the Loan Estimate you receive when you first apply for the loan, as well as in the Closing Disclosure document you receive days before the settlement. Make sure to review them closely and ask questions if there’s anything you do not understand.
If you want to reduce or eliminate closing costs, you have two options. Either you negotiate for the home seller to pay your closing costs or you negotiate premium pricing with your lender. In certain areas, negotiating for the seller to pay the closing costs is a common practice. If you want to go the other way, however, then it’s like you are telling your lender that you are willing to pay a higher interest rate on your mortgage in exchange for the lender paying the closing costs.
Since you can’t be sure if you can really reduce or eliminate your closing costs using these two options, it is still wise to save enough and include these additional cash requirements in your home buying plans. After all, most lenders verify that you have funds available for these costs before they even let you close a deal.
So how much will you need to buy a home?
Considering how much you need to save for the down payment and the closing costs assuming you are buying a $300,000 home, the amount comes to at least $36,000 to $37,500. If you want some peace of mind, however, it is best if you don’t jump into the home buying process with an exact amount on hand. Remember not to leave out another all-important consideration, which is the homebuyer’s buffer.
Buying a home is the kind of transaction where unexpected costs may suddenly arise, so it is always best to prepare for any situation so you can be sure that your money can go further.
Let us say you have already saved $36,000 to $37,500 for your $300,000 home. While that is already quite an achievement, don’t forget that amount is just enough to cover for the down payment and the closing costs. Since anything can happen in between you making your initial payment to you finally moving into your new home, it is best to add enough to your savings to ensure that all the unexpected twists and turns in the home buying process are well accounted for.
Saving an amount equivalent to half-year of your mortgage payments is a sensible goal if you’re thinking about saving for your buffer. That amounts to about $10,752 if you are getting a $300,000 worth of home at 10% down payment. Your savings for your down payment, closing costs, and buffer considered, that’s a total of $46,572 to $48,072 of savings in the bank before you close a deal.