According to the U.S. Census Bureau, the median sales price of new homes in May 2020 was around $317,000. Even if you’re purchasing a home that falls well below that average, chances are it’s one of the most expensive things you’ll ever buy. With such a big expense, you might be wonderingâhow much do you need to save for a house?
The good news? You don’t have to save for the entire purchase price. But the amount you might need on hand to buy a home can be significant. Get some idea of how much money you might need to buy a house below.
How Much Should You Save for a House Down Payment?
It all depends on the price of the home you want to buy and what type of loan program you qualify for. Down payments are usually a percentage of the home cost.
You might have heard that you need 20% down to buy a home. That’s actually not entirely true. Although the Consumer Financial Protection Bureau makes a case for the benefits of 20% down, it also notes that this number doesn’t work for everyone.
So, where does the 20% figure come from? It’s part of the guidelines set by Fannie Mae and Freddie Mac, government sponsored, mortgage guarantee companies. You either have to pay 20% down or pay private mortgage insurance, because analysis indicates that loans without 20% down are riskier for the lenders.
Here’s a look at some common mortgage options and how much you might need to have for a down payment:
The CFPB notes that conventional loans with PMI can require 5 to 15% down on average. If the home price is $300,000, that’s $15,000 to $45,000.
Loans through the Federal Housing Administration require down payments of at least 3.5%. That’s $10,500 on a $300,000 home.
Some loan programs, such as those for rural borrowers through the USDA, or those who qualify for loans through the VA, don’t require a down payment at all.
Other Expenses to Save for
Down payments aren’t the only thing you need to save for when buying a home. Closing costs can be thousands of dollars, and you may need to foot the bill for inspections, home repairs or even fun things, like new furniture. To make the home-buying process less stressful, it’s a good idea to save more than you expect to need for closing costs.
How Long Will It Take to Save for a House?
Saving 20% of your income could catapult you into purchasing a home in the next one to three years, depending on your market. For example, if you’re earning $96,000 per year, that’s $19,200 saved after one year. It’s $38,400 after two years and $57,600 after three. Even if you need 20% down, these amounts are roughly enough to help you buy homes worth between $100,000 and $300,000 within three years.
How Much of Your Savings Should You Spend on a House?
It’s tempting to empty out your savings or cash in your 401(k) to buy your dream home. Even if the house is just your first step into home ownership and isn’t perfect, it’s tempting to do what it takes to get those keys.
But spending 100% of your savings leaves no safety net if something happens. What if something breaks in your new home or there’s a medical emergency? Having some savings on hand to cover these issues helps protect your home, because you’re more likely to be able to continue to pay the mortgage.
Planning to Purchase a Home
If youâre planning on buying a home in the future, it’s important to start saving today. Every little bit you can do to save for a home helps make it happen.
If you want to buy a home for around $300,000 and you can’t qualify for a loan program that requires no down payment, you’ll need at least $10,500 to $15,000. You’ll also need closing costs and other fees, which typically run between 2 and 5% of the purchase price. Assuming $10,000 in closing costs, you need $25,000 minimum to position yourself for home ownership.
A Short-Term Plan
If you’re looking to buy a home within the next year or two, you’d need to save $12,500 to $25,000 a year. Saving 20% of your income can help you save the bulk of that in one or two years if you make more than $50,000 annually. To do that, though, you’ll need to set an aggressive personal budget and be willing to cut out some extras, such as cable or eating out.
A Long-Term Plan
By starting your journey to home ownership as early as possible, you can stretch your plan to five years or more. If you save over the course of five years, that’s only $5,000 a year. That’s $416 a month or just under $100 a week. You really could save for a house this way simply by cutting out a few expensive coffees, pizza nights, dinners, etc.
Start Saving Today
How much should you save before you try to buy a home? It depends on so many factors that there’s not a one-size-fits-all answer. So, do your research early, make a plan and stick with it. And, as you get close to being ready to buy a home, don’t forget to shop around to find the best mortgage rates. Because those mortgage rates, along with your home price, determine how much you’ll pay for your home.
The post How Much Money Do You Need to Buy a House? appeared first on Credit.com.
So youâre at the point in your life where buying a home is not a question of if, but when. Youâre scrimping. Youâre saving. Youâre dreaming of walking through the front door of your very own home.
But as the decision draws near, you start questioning everything. Is now a good time to buy a house? Or is this the worst time? Is it more financially responsible to buy a house right now or wait? And what if you mistime the market, buying too soon or too late, and miss out on lower home prices?
Ultimately, the experts say the answer is less about economies, markets and pandemics and more about you.
So, how do you think through this decision? Youâll want to take time to thoroughly review your personal financial situation and life goals. At the same time, youâll need to gain some understanding of the market dynamics that impact home costs.
This process will take some time, but itâs well worth the effort. With a firm grasp on your personal situation and some context on the housing market, youâll be able to confidently go forth knowing youâre making a fiscally informed decision about whether to buy a house right now.
Honestly assess these aspects of your finances
Financial security is always important if youâre trying to determine when youâre ready to buy a home. To decide if now is a good time to buy a house, ask yourself the following questions about your finances:
How secure is your income?
Job or income stability is an important factor if you are buying a home in a rocky economy, such as the one triggered by the coronavirus pandemic, says real estate economist Gay Cororaton. Even in a robust economy, your income security should be top of mind when youâre thinking of buying a house right now.
If you have any inkling that your position may be eliminated or that youâll be making a career change, you may want to delay buying a home. Even a recent break in employment that caused you to draw down some of your savings may raise a red flag with lenders, says Kate Ziegler, a real estate agent with Arborview Realty in the Boston area.
If youâre considering buying a house right now, you should avoid opening any new lines of credit right before purchasing a home.
Do you have enough money saved?
After income stability, savings is the next-most-important financial factor youâll want to consider to determine if now is a good time to buy a house, Ziegler says. The old rule of thumb was to save 20% of the price of the home for your down payment. While that is ideal, itâs not necessaryâfar from it, Ziegler says. In fact, it has become more common for first-time buyers to put down much less than 20%.
How much house can you afford?
The down payment is one side of the affordability coin. Your monthly mortgage payment is the other side. You need to know how much you can spend on both to determine if you can afford to buy a house right now, says Jeff Tucker, a senior economist at Zillow. Aim for a monthly mortgage payment that doesnât stretch you too thinâexperts typically put this at around 28% of your monthly gross income, according to Bankrate.
With those guidelines, you can determine what you can afford. For example, if you make $4,000 a month, you should typically spend no more than $1,120 on your monthly mortgage payment in total.
How much house that buys you depends on multiple factors: mortgage rates, property tax rates, homeowners insurance andâif you donât have the savings to put down 20%âprimary mortgage insurance, or PMI. To get a rough estimate, plug your income details into an online calculator. For a more specific figure, talk to a local lender and get pre-approved for a mortgage, Ziegler says.
Once you know your price range, you can determine how much savings you need in the bank to buy a house right now. Youâll also need to have money saved for closing costs, which vary but typically run 2% to 5% of the loan amount, according to Bankrate.
Again, Ziegler recommends talking to a lender to really understand what your individual down payment and closing costs would be. Finally, be sure to add a line item in your budget for home maintenance that will inevitably pop up after you move in. Whether itâs a dishwasher on the fritz or a leaky roof, you donât want to be caught off guard, so be sure to save money for emergency home repairs.
How is your credit?
Your credit profile is also important to lenders, and it will likely be a factor in what interest rate youâre offered. Given that, you should be checking your credit report and know your credit score before investing in a home. If youâre considering buying a house right now, you should avoid opening any new lines of credit right before purchasing a home, Tucker says.
What is your debt-to-income ratio?
Another factor lenders check is your debt-to-income ratio, or DTI, Tucker says. This is the percentage of your gross monthly income that goes to paying monthly debt payments, plus your new mortgage. Lenders typically require this ratio to be 45% or less but prefer it even lowerâin the 33% to 36% range.
Have you considered the opportunity cost?
Another financial consideration when deciding if now is a good time to buy a house is the opportunity cost of delaying a home purchase, Ziegler says. If youâre renting in a market where the rent is higher than your would-be monthly mortgage payment, you may be spending a lot more money each month than if you were to purchase a home. And of course, with a mortgage, your monthly payment increases your equity.
After taking a clear-eyed look at your income, savings and these other financial factors, you will have a better sense of when youâre ready to buy a home and whether nowâs the time for you to dip into the market.
Consider key market factors
Next, take a look at factors that are outside of your control, but still influence your purchase: prices, interest rates and national employment trends.
Where are housing prices?
As youâre looking at the market, one of the biggest considerations when you are ready to buy a home will be housing prices and availability. Research your local market by talking to real estate agents who work specifically in the area where you want to buy and asking them about market trends, Ziegler says.
Track current listings and recently sold prices to get a sense of how prices look today. Generally, the tighter the inventoryâmeaning the fewer houses availableâthe higher prices will be, Tucker says.
Whatâs going on with interest rates?
When youâre ready to buy a home could also depend on another major economic factor: interest rates. When interest rates are low, your housing budget is effectively supercharged, Tucker says, and you can afford a more expensive house because youâre spending less on interest. When they are high, the opposite is true.
This is what compels people to buy when interest rates are lowâyou get more for your money. If you get a 30- or 15-year fixed-rate mortgage, you lock in that rate for the entire life of the loan, which could save you money now and into the future, Tucker says.
How does employment look nationally?
Finally, if you want to get a general idea of where the housing market may be headedâif prices will drop or rise soonâcheck out the national employment trends, Cororaton says. Low unemployment means prices will generally trend upward because more people can afford houses, boosting competition and prices, she says.
But if unemployment is inching up, then people are losing jobs and will be more likely to remain in their current homes. As a result, there tends to be less competition for them, lowering prices.
You donât need to be an expert in the market to determine if now is a good time to buy a house, but a baseline understanding of these big-picture forces can give you the confidence you need to embark on your home-buying journey.
Think about your future plans
After reviewing your savings and income and assessing the market conditions, take a step back and think about your life plans over the next few years. Your lifestyle and goals will help determine whether now is a good time to buy a house.
âFor buyers who are not certain whether they will still be living in the same place in three or five years, I would caution against locking themselves into a certain location,â Ziegler says. âIf theyâre just not sure what the future holds, it may be better to have that flexibility.â
Itâs unlikely in many markets that you will see substantial financial gain from homeownership if you move within five years, Ziegler says. Your equity gains will likely be offset by the transaction costs of buying and selling your home.
That goes for remote workers, too. Are you working from a home office these days? While widespread remote work may allow buyers to consider homes farther from their offices, ask yourself: Is my company going to permanently allow employees to work from home? Do I think there will be other remote opportunities in the future?
While youâre thinking about the next three to five years of your career, also consider the next three to five years of your personal life. Will you have a family? Will that family grow?
These can be weighty topics, so be sure to think them through on your own schedule. Buying a house is a big decision, and itâs not one to be rushed. By taking the time to assess your life, from your job security to your financial health to your lifestyle, and considering the impact of market factors, youâll have a clearer sense of when you are ready to buy a home.
If youâve decided that buying a house right now is the best decision for you, itâs time to learn more about how it will impact your budget. Get started by reading up on these eight unexpected expenses when buying a home.
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The post Is Now a Good Time to Buy a House? appeared first on Discover Bank – Banking Topics Blog.
Being a homeowner on a budget is nothing to be ashamed of, if anything, most people prefer to keep their expenses low, especially after recently purchasing a home! But,there are some things you shouldn’t cheap out on, and we’ve got you covered.
The post 5 Things You Should Pay Premium for as a Homeowner or Renter appeared first on Homes.com.
Thereâs something weird happening with the real estate markets today. Normally in a recession, demand for rentals goes up while demand for houses goes down. But if thereâs anything 2020 has taught us, itâs that everything is turned on its head right now.
Instead, weâre seeing an interesting trend: despite the ongoing pandemic, home-buying is experiencing higher demand now than they have been since 1999, according to the National Association of Realtorsâ (NAR). If youâve been hoping to buy a home soon, youâre probably already aware of this weird trend, and excited. But is it the same story everywhere? And is a pandemic really the right time to buy?
How the Pandemic is Changing Homeownership
This pandemic is different from any other in history in that many people â especially some of the highest-paid workers â arenât being hit as hard as people who rely on their manual labor for income. This, coupled with an ultra-low mortgage rate environment and a new lifestyle thatâs not fit for a cramped apartment, is creating the perfect storm of high-dollar homebuyers.
âI didnât want to pay someone elseâs mortgage to have three roommates,â says Amy Klegarth, a genomics specialist who recently purchased a home in White Center, a suburb of Seattle where she was formerly renting. âI moved because I could afford to get a house with a large yard here for my goats, Taco and Piper.â
Whether you have goat kids or human kids (or even no kids), youâre not the only one looking for a new home in a roomier locale. According to the NAR report, home sales in suburban areas went up 7% compared to just before the pandemic started. In some markets, itâs not hard to understand why people are moving out.
Where Are People Going?
Apartments are small everywhere, but theyâre not all the same price. For example, homes in cities tend to be 300 square feet smaller than their suburban counterparts. Some of the hottest home-buying markets right now are in areas where nearby rents are already too high, often clustered around tech and finance hubs that attract high-paid workers. After all, if you canât go into the office and all of the normal city attractions are shut down, whatâs the point of paying those high rental costs?
According to a December 2020 Zumper report, the top five most expensive rental markets in the U.S. are San Francisco, New York City, Boston, San Jose, and Oakland. But if youâre ready to buy a home during the pandemic, there are nearby cheaper markets to consider.
If You Rent in San Francisco, San Jose, and Oakland, CA
Alternative home-buying market:San Diego, Sacramento
Average rent: San Francisco, $2,700, San Jose, $2,090; Oakland; $2,000
Average home value (as of writing): San Diego ($675,496) and Sacramento ($370,271)
Estimated mortgage payment with 20% down: San Diego ($2,255) and Sacramento ($1,236)
Big California cities are the quintessential meccas for tech workers, and thatâs often exactly whoâs booking it out of these high-priced areas right now. Gay Cororaton, Director of Housing and Commercial Research for the National Association of Realtors (NAR), offers two suggestions for San Francisco and other similar cities in California.
First, is the San Diego-metro area, which has a lot to offer people who are used to big-city living but donât want the big-city prices. An added bonus: your odds of staying employed as a tech worker might be even higher in this city.
âProfessional tech services jobs make up 18% of the total payroll employment, which is actually a higher fraction than San Jose (15.5%) and San Francisco (9.3%),â says Cororaton.
If youâre willing to go inland, you can find even cheaper prices yet in Sacramento. âTech jobs have been growing, and account for 7% of the workforce,â says Cororaton. âStill not as techie as San Jose, San Francisco, or San Diego, but tech jobs are moving there where housing is more affordable. Itâs also just 2 hours away from Lake Tahoe.â
If You Rent in New York, NY
Alternative home-buying market: New Rochelle, Yonkers, Nassau, Newark, Jersey City
Average rent: $2,470
Average home value (as of writing): New Rochelle ($652,995), Yonkers ($549,387), Nassau ($585,741), Newark ($320,303), or Jersey City ($541,271)
Estimated mortgage payment with 20% down: New Rochelle ($2,180), Yonkers ($1,834), Nassau ($1,955), Newark ($1,069), or Jersey City ($1,807)
Living in New York City, it might seem like you donât have any good options. But the good news is you do â lots of them, in fact. They still might be more expensive than the average home price across the U.S., but these alternative markets are still a lot more affordable than within, say, Manhattan.
New Rochelle and Yonkers
Both New Rochelle and Yonkers are about an hourâs drive from the heart of New York City, says Corcoran. If you ride by train, itâs a half hour. Both New Rochelle and Yonkers have been stepping up their appeal in recent years to attract millennials who canât afford city-living anymore (or donât want to be âhouse poorâ), so youâll be in good company.
âNAR ranked Nassau as one of the top places to work from home in the state of New York because it has already a large population of workers in professional and business services and has good broadband access,â says Cororaton. If you have ideas about moving to Nassau youâll need to move quickly. Home sales are up by 60% this year compared to pre-pandemic times.
Newark or Jersey City
If you donât mind moving to a different state (even if it is a neighbor), you can find even lower real estate prices in New Jersey. This might be a good option if you only need to ride back into the city on occasion because while the PATH train is well-developed, itâs a bit longer of a ride, especially if you live further out in New Jersey.
If You Rent in Boston, MA
Alternative home-buying market: Quincy, Framingham, Worcester
Average rent: $2,150
Average home value (as of writing): Quincy ($517,135), Framingham ($460,584), or Worcester ($284,936)
Estimated mortgage payment with 20% down: Quincy ($1,726), Framingham ($1,538), or Worcester ($951)
Boston is another elite coastal market, but unlike New York, thereâs still plenty of space if you head south or even inland. In particular, Quincy and Framingam still offer plenty of deals for new buyers.
If you like your suburbs a bit more on the urban side, consider Quincy. Although itâs technically outside of the city, itâs also not so isolated that youâll feel like youâre missing out on the best parts of Boston-living. Youâll be in good company too, as there are plenty of other folks living here who want to avoid the high real estate prices within Boston itself.
Framingham is undergoing an active revitalization right now in an effort to attract more people to its community. As such, youâll be welcome in this town thatâs only a 30-minute drive from Boston.
âNow, if you can work from home, consider Worcester,â says Cororaton. âItâs an hour away from Boston which is not too bad if you only have to go to the Boston office, say, twice a week.â Worcester (pronounced âwuh-sterâ) is also a great place for a midday break if you work from home, with over 60 city parks to choose from for a stroll.
Average Rent for 1-Bedroom Apartment
Housing Market Options & Avg. Monthly Mortgage*
San Francisco, CASan Jose, CAOakland, CA
San Diego ($2,255) Sacramento ($1,236)
New York, NY
New Rochelle ($2,180) Yonkers ($1,834)Nassau ($1,955)Newark ($1,069)Jersey City ($1,807)
*Average home mortgage estimates based on a 20% down payment.
Should You Buy a House During a Pandemic?
Thereâs no right or wrong answer here, but itâs a good idea to consider your long-term housing needs versus just whatâll get you through the next few months.
For example, just about everyone would enjoy some more room in their homes to stretch right now. But if youâre the type of person who prefers a night on the town, you might be miserable in a rural area by the time things get back to normal. But if youâve always dreamed of a big vegetable garden or yard for the family dog, now could be the right time to launch those plans.
Another factor to consider is job security. And remember that even if youâre permanently working from home today â and not everyone has this ability â living further from the city could limit your future opportunities if a job requires you to be on-site in the city.
Finally, consider this: most homes in outlying areas werenât built with the pandemic in mind. For example, â… open floor plans were popular, pre-pandemic,â says Cororaton. âIf the home for sale has an open floor plan, youâd have to imagine how to reconfigure the space and do some remodeling to create that work or school area.â
Here are some other things to look for:
Area for homeschooling
Broadband internet access
Proximity to transport routes
Office for working from home
Is It More Affordable to Buy or Rent?
There arenât any hard-and-fast rules when it comes to whether itâs cheaper to rent or buy. Each of these choices has associated costs. To rent, youâll need to pay for your base rent, pet fees and rent, parking permits, deposits, renters insurance, and more. To buy, youâll have an even bigger list, including property taxes, maintenance and upgrades, HOA fees, homeowners insurance, closing costs, higher utility bills, and on.
Each of these factors has the potential to tip the balance in favor of buying or renting. Thatâs why it makes sense to use a buy vs. rent calculator that can track all of these moving targets and estimate which one is better based on your financial situation and the choices available to you.
In general, though, most experts advise keeping your housing costs to below 30 percent of your take-home pay when setting up your budget. The lower, the better â then, youâll have even more money left over to save for retirement, your kidâs college education, and even to pay your mortgage off early.
The post Popular Housing Markets During the Pandemic appeared first on Good Financial CentsÂ®.