3 Mistakes to Avoid When Saving for a Home

by Maurie Backman | Updated July 19, 2021 - First published on Jan. 16, 2021

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A realtor walking his clients through an empty house and pointing out the window.

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Don't fall into these dangerous traps.

With mortgage rates plunging to record lows, now's a good time to become a homeowner. But to achieve that, you'll need to save diligently for a down payment. Though it's possible to purchase a home with less than 20% down, doing so limits your options and subjects you to private mortgage insurance, a costly premium you'll need to pay on top of your monthly mortgage payments.

That said, there are certain things you shouldn't do in the course of saving for a home. Here are three big mistakes to avoid.

1. Raiding your emergency fund for a down payment

It's an extremely smart idea to have an emergency fund with enough money to cover three to six months of essential bills. That way, you won't need to resort to debt the moment you lose your job or get hit with an unexpected expense. But tapping your emergency fund to come up with a down payment for a home is a bad idea.

First, that's not what that money is for, because while becoming a homeowner may be a goal, it's actually not an emergency. Second, if you raid your emergency stash to buy your home and then get caught in a financial crunch, you'll risk falling behind on your mortgage payments. And that can put you at risk of losing your home. Be sure to leave your emergency savings alone when buying a home -- and come up with the money outside of those funds.

2. Not accounting for immediate repairs

When you buy a home, you can't expect it to be perfect off the bat. Chances are, you'll need to make a few changes upon moving in, and to that end, you'll need money. But once again, don't plan to use your emergency fund for move-in fixes. Instead, account for them as you sock away that down payment. If you expect to buy a $300,000 home and want to put 20% down, or $60,000, wait until you've saved $65,000 before moving forward with a purchase.

3. Forgetting about closing costs

Getting a mortgage isn't free. Rather, there are fees you'll need to pay to finalize your home loan that are known as closing costs.

Closing costs generally amount to 2% to 5% of a mortgage, so if you're borrowing $200,000, you should expect to pay anywhere from $4,000 to $10,000. Each lender can set its own closing costs, and one may offer much lower fees than another. But either way, that's another expense you should plan for in the course of saving for a home.

The good news is that you'll generally be given the option to roll your closing costs into your mortgage and pay them off over time if you don't have the money up front. But doing so will make your mortgage payments more expensive, so if you can cover those fees when you finalize your loan, you'll spend less each month from that point on.

Saving for a home is a process, and generally, a lengthy one. If you're going to make the effort to save, be sure to account for all of the costs involved, and don't count on your emergency fund to help you purchase a home. If you don't follow these rules, you could easily wind up with a world of financial stress on your hands, and that's not a great way to kick off homeownership.

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