How Much To Save Before Buying a Home

Knowing how much to save for a home is about more than just down payment if you're not paying for the property in cash. Purchasing a home is a often a large financial decision involving quite a lot of up front real estate purchase costs including future mortgage payments in some cases. 

In the United States, there are real estate purchase costs apart from the mortgage down-payment that may also be required at the time of sale. For example Realtor commission, closing costs, prepaid tax, mortgage insurance etc. may all be costs included in a mortgage contract. If the property is international, less costs may be required depending on the real estate regulations within that country. This article will discuss knowing how much to save for a home in terms of the following items:

• Down payment

• Mortgage and hazard insurance

• Closing and additional costs

• Property taxes

• First month's expenses

• Realtor commission

Downpayment

The down payment is the most obvious and essential cost needed for a new home. Depending on the type of loan this could typically range from a few percent to 20% or higher. Some owner financed homes may offer a rent to buy program where the buyer accumulates a down payment through the initial month's rent and then converts to a mortgage thereafter. The down-payment amount could be as low as a few thousand and as high as 10's of thousands or more dependant on the market value, location, and mortgage requirements if any.

Mortgage and hazard insurance

Mortgage insurance may not be required if more than 20% of the home's value is paid for in advance via down payment. Otherwise, mortgage insurance may be required by the lender. Moreover, for the owners own interest and that of the mortgage company, hazard insurance requirements can also be levied upon the tax payer. In real estate investing, having insurance can also hedge against investment risk. This insurance if combined with auto insurance may be discounted due to multi-coverage discounts offered by the insurer. Typically, mortgage and hazard insurance may run about $100-$200 per month combined. Sometimes, mortgage companies will require advance payment of one or both these types of insurance which don't necessarily include flood protection.

Closing and additional costs

Closing costs can add up to a few thousand depending on the percentage required by the mortgage company. For example, on a $125,000 USD property, a 2% closing cost fee would cost $2,500. In addition to the closing cost are other related fees having to do with the home's title, deed documentation, and other charges that might be added into the mortgage. Moreover, some loans require inspections to be performed to insure the quality of the home meets acceptable standards and to help protect the home buyer from unforeseen costs and expenses. The closing and other costs could end up costing between $2000-$5000 depending on the sale price of the real estate.

• Title registration and transfer

• Title search

• Property appraisal(s)

• Property inspection(s)

• Closing fee

• Miscellaneous expenses/'Junk fees'

Property taxes

Property taxes are levied by local government and vary in cost, but 1-2% of the home's 'assessed value' is an approximation that can be used when estimating the tax cost on the property. For State property tax values or exact tax percentages consult local government tax listings or a property tax comparison chart. Property tax may be required to be paid into an escrow account on a monthly basis. Thereafter, the mortgage company may pay the property tax separately to help insure the stability of the mortgage and it's loan to their client. This also consolidates payment of taxes for the mortgagee which can be helpful in bill paying.

First month's expenses

First month's expenses include mortgage payment, insurance, utilities, taxes and even furnishing and repairs to the property. Thus, it is possible the first month's expenses for a new property are going to be higher than in subsequent months. For this reason it can be a good idea to plan ahead financially in anticipation of such expenses as there may be items not mentioned in the seller disclosure that need repair, or the real estate may have been a foreclosure with property damage or you may simply want to customize the property to your taste. In such cases, an extra $1000-$4,000 or more can be needed and in some cases required by the mortgage lender.

Realtor commission

Unless a for sale by owner (FSBO) is used and the buyer does not seek the assistance of an agent or Realtor, a commission fee is paid to the facilitating agents of the home's sale. These fees typically range from 5-6% and may or may not be worth the cost depending on the buyer's experience, know how and ability to negotiate. An agent's cost may sometimes end up costing less than had an agent not be used at all due to the agent's knowledge of the marketplace and property purchase techniques. On a $125,000 property one can expect to pay around $6-$7,500 in commission.