12 Steps to buying a Home, Step 2

    12 Steps to buying a Home, Step 2

    Feb 02, 2021

    Save for a Downpayment and Closing Costs

    It can take a lot of work to save up to buy your first home, and you shouldn’t stop when you’ve stashed away enough for a downpayment.

    Disciplined clients scrimp and save enough cash for a 20% down payment, but they make the mistake of dipping into savings to cover the unexpected costs of buying a new house. And that’s understandable. A 20% down payment can be a considerable amount of money. Once you hit that number, it feels like crossing the finish line. But there are other costs to consider before you get the keys to your new home.

    The Down Payment is only one of the costs you need to be prepared for. When buying a home you will have the Down Payment, but you will also have Closing Costs to buy the home.

    Here are the savings buckets to consider.

    1. Closing costs and administration fees

    To be prepared for the home-buying process, you’ll need a plan to pay for closing costs and other fees.

    Closing costs vary depending on where you’re buying a home, but they include the miscellaneous costs that come with getting your mortgage and transferring legal ownership from one party to the next. This might include attorney fees, escrow fees, loan origination fees, title insurance, property tax and your first yearly homeowners insurance premium. Sometimes, the costs for your home inspection and appraisal are wrapped up into closing fees, too.

    According to the real estate site Zillow, closing costs can range from 2 to 5% of your home’s purchase price. You should have at least this much set aside, in addition to your down payment fund, to play it safe. To get a better idea of what’s ahead, ask your real estate agent what costs you can expect in your state or locality. Keep in mind that sometimes, you can negotiate with the seller to split the costs, while other times the buyer is fully on the hook.

    You could always use some cash from your down payment fund to cover closing costs, but be sure to calculate how a smaller down payment will impact your mortgage, then weigh the pros and cons. Usually, a higher down payment means better interest rates as well as a lower monthly payment.

    “The down payment actually puts equity in the home, whereas the fees are just gone,” says Hudnett Reiss.

    If paying for closing costs up front is not an option, you may be able to roll them into the amount you finance with your mortgage, says Hudnett Reiss. But then you will have to pay interest on those costs, which increases the overall amount that you’re spending.

    2. Home furnishings and other move-in costs

    It is also important to consider the "What is coming next phase", that may be additional expenses. Move-in costs entail the mundane purchases like paint for touch-ups or wood glue to repair furniture nicks. But you’ll also want to set aside the necessary funds to buy the kind of rugs, couches, shelves, window treatments and other furnishings that you want to make your new space feel like home.

    Of course, you have some flexibility in this area. Each homeowner decides for themselves which expenses they can put on the back burner until money is not so tight. For instance, you may be willing to use hand-me-down furniture from friends or family or make do with furnishings from your old home.

    However, some move-in costs may be unavoidable, such as utility deposits, service activation fees for internet and cable and other essentials.