Buying a home is one of the most special and important moments in your life. For many, purchasing a home is the fulfillment of a lifelong dream and proves that you have become successful in life. One of the reasons why purchasing a home is so sought after is that it is extremely difficult to do, especially in today’s climate. Buying a home requires lots of money upfront, and on top of that, you’ll be making monthly mortgage payments for decades. So when you’re looking to take steps to buy a house, how much money should you have saved up? Let’s explore what your savings situation should look like when you are attempting to buy a house.
One of the biggest factors that influences the amount you should save up to buy a home is the amount of income you are taking in. If you are making a lot of money, you can afford to save a lot of money. As a result, you’ll be able to accrue a large amount of savings in a relatively short period of time. When you’re making a lot of money, saving for a home isn’t a huge burden on your finances, meaning that you can save for a while. However, when your income is low, you may have to cut out certain luxuries or expenses to save enough. You may not be able to make these sacrifices forever, meaning you can only save for a finite period of time, lowering the overall amount of money you can actually save for a home.
The biggest influence on how much you have to save for a home will be the home’s list price. When buying a home, a certain portion of the list price will be paid upfront, while the rest will be paid off in a mortgage loan. It is recommended that the down payment for your home be at least 20% of the list price. So if you’re buying a house for $500,000, you’re going to have to save around $100,000 just for the down payment alone. If you want a good idea of how much you’ll need to save, pick out some houses you like and use their list prices to get a ballpark estimate of what you need to save.
Something that many people don’t factor into the amount they have to save is closing costs. Typically, closing costs will require you to pay several thousands of dollars, making it a decent-sized expense that you need to take care of. Closing costs are an umbrella term that covers a wide variety of fees that you need to settle when you buy a home. These fees include but aren’t limited to: origination fees, title insurance, credit report fees, and administrative costs. Although you can negotiate with the seller to get them to pay some of the closing costs, the buyer is typically stuck with the lion’s share of the fees. As a result, closing costs will almost always be an expense that you need to save a few extra thousand dollars for.
A common mistake that many homebuyers make is only saving up enough to cover the home’s down payment and closing costs. While you certainly need to have enough money, that alone shouldn’t be your savings goal. You should always have some type of emergency fund if something like an unexpected medical problem or car issue comes up. You need to have some kind of savings to cover these unexpected costs, or else they’re going to wreak major havoc in your life. You might think that these events are rare, but spending all your savings simply isn’t worth the risk. As a result, you may want to save an extra couple hundred dollars just so you have a safety net in an emergency scenario.