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A well-planned first-time homeowners' budget will meet two important financial goals. The first is to become financially able to buy the home. The second is to remain financially able to keep it.
Perhaps you already have your down payment and are ready to take the next step. Or maybe you want to work out how much you need to save before you start to look for a place of your own. A well-planned first-time home buyer budget can help you stay on a path to long-term success.
There are two types of costs involved in buying a home: Upfront payments and ongoing ones. Let's break them down.
The most obvious cost you'll deal with is the price of the home itself. Few people can afford to buy real estate without taking out a mortgage. Here are the upfront costs you'll need to cover.
Besides the mortgage, you'll also pay the usual expenses associated with any relocation.
For most of us, a home is the largest purchase we'll ever make. That's why it makes sense to understand all the costs ahead of time and work out how they'll fit into your budget, whether you're browsing starter homes in the suburbs or townhouses in a bustling downtown area.
Your monthly mortgage payment will depend on the amount you borrow, the mortgage rates you qualify for, and the type of property you buy. Use a mortgage calculator to get an idea of what your costs might look like.
Mortgage lenders sometimes call the key components of your monthly payment PITI or PITIA. It includes:
If you make a down payment of less than 20%, you'll likely have to pay a mortgage insurance premium (sometimes called PMI or private mortgage insurance). There are additional expenses you'll have to factor in as a homeowner, which we'll cover below.
From utilities to building maintenance, there are several expenses homeowners should prepare for. Here are some of the most common costs.
Here are the steps to create a first-time homeowner budget.
That last item may be the biggest new (and ongoing) expense you'll face. There is no way to predict exactly how much money you'll spend or when. But many people ballpark annual maintenance at 1% of the purchase price. Maintenance is not an "if," but a "when." You might have no expenses for a period of time, and then several large expenses all at once. You can be certain things will need to be replaced or repaired in your home sooner or later.
Once you've got these items covered, you may also want to set a new savings goal for future remodels or upgrades. Depending on your total monthly spending, you may find you need to wait a while before you can update the kitchen or bathroom.
Here's a recap of the necessary budget line items. You may have other expenses to add.
A first-time home-buyer class can also walk you through some of the important categories to include in budgeting for a home.
The money you set aside to buy a home should be in a place you can access on demand without penalty. A high-yield savings account or a money market account (MMA) both give you full access to your funds, so long as you don't make more than six withdrawals per month. You can earn significantly more interest than you'd get from a typical checking or savings account.
A certificate of deposit (CD) is another option for your down payment savings. The interest rates are comparable to those of MMAs and high-yield savings accounts. But keep in mind that you'll pay a penalty if you withdraw the money before the CD matures.
It can be tempting to invest your home-of-your-own savings in the stock market to try to earn more interest. However, the stock market is only a good option for money you don't need in the short term -- you don't want to have to sell when the market is down. Stocks can be volatile and there are no guarantees.
It takes many people a couple of years or more to save toward the down payment on a house and build up a sizable emergency fund. During that time, it's smart to maximize earnings and minimize risk.
Here are some other questions we've answered:
If you're a first-time home buyer, our experts have combed through the top lenders to find the ones that work best for those who are buying their first home. Some of these lenders we've even used ourselves!
As a first-time home buyer, you'll need money to move, turn on utilities, and possibly fix up your new place. Your ongoing monthly housing budget will include monthly mortgage payments, homeowners insurance, property taxes, and possibly homeowners association fees. You may also have to pay mortgage insurance. Lastly, try to set aside 1% of your home's purchase price each year for maintenance.
Some home buyers are surprised at the closing costs. Others may be surprised if their lender requires them to fund an escrow account for homeowners insurance policy premiums and property taxes. You might also pay a number of administrative fees. If your lender allows you to roll these fees into the loan, you'll pay interest on them for the entire life of the loan.
The down payment on a house is a short-term goal. Use a high-yield savings account or money market account to maximize your earnings while keeping your cash accessible and your risk of loss low.
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