- Buying a home is a big financial undertaking that you need to prepare for.
- Financial expert Suze Orman says buyers should be able to check these boxes off first before making a home purchase, including testing your new budget.
Here's how to know if you should take that leap.
Some people wait until they reach a certain place financially to have a baby. Just as that's a smart thing to do, so too should you wait until your financial house is in order before buying an actual house.
If you're not sure whether you're ready to take on the responsibility of homeownership, you're in good company. Thankfully, financial expert Suze Orman has some helpful advice. Here are three things she thinks you should do before moving forward with a home purchase.
1. Build an emergency fund to cover eight months of living costs
Most financial experts will tell you that having an emergency fund is important. That way, you'll have money in your savings account to tap in case you run into an issue like job loss or a large unplanned bill.
But whereas most experts agree that saving enough to cover three to six months of living costs will suffice, Orman thinks you should go beyond that point and amass enough savings to cover eight to 12 months of bills before buying a home. Saving that extra money could put you in an even more secure place from a home-buying perspective.
2. Save enough for a 20% down payment
Although many mortgage lenders will accept less than 20% of a home's purchase price at closing, Orman thinks coming up with at least 20% is important. The reason?
If you make a 20% down payment on a conventional loan, you'll avoid private mortgage insurance, or PMI, which is a costly premium you get charged to protect your lender. PMI can easily equal 1% of your mortgage so that if you borrow $250,000 to buy a home, you might pay an extra $2,500 a year.
To be clear, though, the 20% down payment you come up with should be separate from your eight months of living expenses socked away for emergencies. You should not pull from your emergency cash reserves for home-buying purposes.
3. Take your new budget for a spin
Buying a home could cause your bills to increase. Orman says before you actually buy, you should try to figure out what your new budget will look like -- and then make sure it's sustainable based on your income and lifestyle.
So, say you rent a home now and currently spend $1,200 a month on housing. If you think your housing costs will increase to $3,000 once you purchase a home (accounting for things like property taxes, insurance, maintenance, and repairs on top of your monthly mortgage payments), you should put $1,800 from your paychecks into savings each month for six months and see how that works for you.
If you can swing it, great. If not, you may need to hold off on buying a home or rethink your price range.
Homeownership can be extremely rewarding and lend to financial stability. But it's important to jump in at the right time. It pays to follow Orman's advice and hit these milestones prior to making a home purchase. Doing so could spare you a world of financial regret.
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