How Much Money Do You Really Need to Save For a House?

Buying a house can be both exciting and daunting. The first question most people ask is: How much money do I need to save to buy a house?

The down payment is the most daunting savings hurdle to buying a house for most people, but it’s not the only cost you need to consider when purchasing a home. You also need to think about mortgage costs, closing costs, and moving and repair costs.

So how much, exactly, do you need? Here’s how to figure it out.

Financing

Most people buying a house will need to finance a good portion of the sales price. Your down payment and credit score will influence the interest rate, loan amount, and type of loan you’ll be able to qualify for.

According to the Federal Housing Finance Administration (FHFA), one mistake many buyers make is taking the first loan they are offered because they don’t realize that they can shop around. “On any given day, lenders and brokers may offer different interest rates and fees to different consumers for the same loan, even when those consumers have the same loan qualifications,” the FHFA cautions in their report.

There are also different types of mortgages with varying features. Shop around to make sure you’re getting the best possible deal.

According to the November 2019 U.S. Census, the average home price is $299,400.00. The 2019 National Association of Realtors (NAR) “Profile of Home Buyers and Sellers” says that first-time homebuyers pay an average down payment of 6%.

Down payment: $17,964

Based on our average purchase price of $299,400, your down payment would be $17,964.

Credit repair services (if needed): Free

If you think you need to enlist help to repair your credit, be aware that anything a credit repair service can do legally, you can do yourself. “Only time and a personal debt management plan will improve your credit,” says the Federal Trade Commission which offers information about how to repair your credit, including a sample letter to send when disputing errors.

When looking at your financial picture, the first thing to do is get a copy of your credit report. Everyone is entitled to one free report a year from each of the three credit agencies (Experion, TransUnion, and Equifax). The only official site where you can find all three is annualcreditreport.com.

Be mindful of other websites offering free credit reports or scores. They aren’t part of the legally mandated free credit report program.

Once you have your credit reports, check them for errors. Request that any inaccuracies or mistakes be investigated. As well as paying bills on time, credit agencies also take into consideration how much total credit you utilize, so paying down debt can be another good way to increase your credit.

Home search costs: $25 to $500

When considering how much money you need saved to buy a house, don’t forget to take into consideration the time you’ll need to spend looking for that house. Will you need to take time off from work in order to do so? Will you spend extra for transportation (gas or otherwise) to view multiple properties?

Every buyer is different as far as their shopping habits go. As Shal Shahani, a top Boston-area real estate agent, says, “It’s not a question of how many houses you see, it’s just seeing the right house.”

Some people, Shahani says, have the type of personality where they think they shouldn’t buy the first house they see because they haven’t seen enough or been educated enough. “We tell those buyers that it’s fine to keep looking,” Shahani continues, “But understand that if the first house you’ve seen checked all your boxes, you’re going to be comparing it to every other house.”

Closing costs: $5,868

According to a July 2019 report from ClosingCorp, a data and technology provider for mortgage and real estate services, the national average closing costs are $5,779, or 1.96% of the average sales price of $294,164.

Using our home purchase price of $299,400 that would be $5,868.

Closing Disclosure

A Closing Disclosure will be delivered to the buyer/borrower on all purchase transactions at least three days prior to loan closing. This Closing Disclosure will list all fees and costs associated with the home sale for both the seller and the buyer. You can get more information and download an interactive copy of the Closing Disclosure from the Consumer Financial Protection Bureau website.

Here’s the breakdown (on average) of some of the most common settlement charges.

Mortgage fees

• Application fee: Average cost $365 (not every lender charges one).

• Loan origination fee: Average cost $2,734 (with 5% down). This includes any fees charged by your broker or lender for the origination of your loan. These fees can also be called lender fees, underwriting fees, processing fees, or broker fees, among other names. Total origination fees are generally limited to 3% of the loan amount and include the fees a lender and/or broker charge for completing your loan.

• Prepaid interest: Depends on loan amount, interest rate, and days between settlement (closing) and your first payment date. Often, your first mortgage payment isn’t due until at least six weeks after you close, but you’ll still need to pay interest on your loan for those days. To calculate this, take your interest rate — say, 3.75% — and multiply it by your loan amount, then divide that number by 365. In the case of our $299,400 home, the daily interest rate would be $30.76. If your first mortgage payment wasn’t due until six weeks after closing, the prepaid interest would equal $30.76 x 42 days, or $1,291.92.

• Private mortgage insurance (PMI): Average cost $50 to $100 a month. For down payments of less than 20% on a conventional loan, many lenders require PMI. This insurance policy covers the lender’s losses if you end up defaulting on the loan. Once you reach 20% equity in your house, you may request to cancel your PMI.

Appraisal ($300 to $650) and survey ($155) fees

Home appraisals are necessary (and required by the lender) in order to secure a loan for a purchase. An appraisal states officially what a property is worth, taking into consideration things like market value, how much the house has sold for in the past, land value, and cost of any home improvements. No bank or lender will approve a loan amount that is higher than what the house is “worth.”

A survey is a document that reviews and details all of your property lines, including all structures, improvements, and land. It shows existing property lines as well as any infringements or encroachments on those lines. While land surveys are public records available through your county records office, if a property hasn’t been surveyed in a while or no previous survey can be located, a new one often needs to be conducted (by a licensed surveyor).

Inspection: $300 to $1,000

Home inspections, while generally optional, are conducted so that you fully understand the condition and quality of the home you are buying. While a lender will rely on an appraisal to determine your home’s value, an inspection allows you to know upfront exactly what you are buying before you are fully bound by the purchase contract.

Even if you’re paying cash, it’s a good idea to get a home inspection done by a certified inspector. A thorough home inspection will provide you with most everything you need to know about your new home’s flaws, from small repairs to big problems.

Once you know all the areas that need attention, you can try and negotiate for the seller to pay for certain repairs before closing. They can, of course, refuse. If this happens, research what those repairs are going to cost you. Something major, like a new roof or a new heating/cooling system, could be close to $10,000 each. Make sure you have money set aside for any repairs that can’t wait — or be ready to back out of the deal.

Title insurance: $175 to $900 per $100,000 in home value

Lenders will require title insurance for the portion of your home’s value that is financed. Title insurance protects against any unforeseen claims against the title. For instance, if there is an old sale document missing a signature or a lien on the property, title insurance covers the cost of sorting that out (court costs, settling the lien) as well as the full value of the loan if there is a valid claim.

It’s also advisable to take out title insurance for the portion of the house you own outright, as the lender’s policy won’t cover that.

Taxes ($538 to $5,658), insurance ($1,737), and cash reserves ($3,102 to $3,656)

Texas (one of the highest) has a property tax rate of 1.81%, so annual taxes on a $299,400 home would be $5419.14. The state of Louisiana (the lowest) has a tax rate of 0.18%, meaning annual property taxes on a $299,400 house would equal $538.92.

If the seller has paid their property taxes for the entire year (which in most cases they will have), your settlement will include a line of property tax reimbursement to the seller for whatever time remains in the year. Real estate taxes are generally paid annually at the beginning of the year.

Homeowners insurance varies by state and amount, with an average cost of $1,737 annually for a $300,000 house with a $1,000 deductible and $300,000 in liability.

Cash reserves: Two months’ worth of mortgage and escrow payments. For our example of a $299,400.00 home with 6% down, the average monthly mortgage would be about $1,303 and your average escrow payment would be between $188 and $525. Most lenders require two months’ worth of mortgage and escrow payments in your checking and savings accounts. So, two months’ reserves would equal between $3,102 and $3,656.

Costs beyond the closing 

So you’ve made it through your closing and are now standing in the doorway of your new house, keys in hand, with no one else around. Congratulations, you’re a new homeowner! Many buyers forget — or aren’t aware — that there are still more expenses to think about after the closing. Here are some other situations and scenarios to consider when figuring out how much money to save to buy a house.

Moving costs: $538 to $1,602

Moving costs depend on a variety of things; How many rooms you are moving from/to, whether you do the packing yourself and how far you’re moving (across town or across the country). According to HomeAdvisor, the average cost of hiring movers is between $583 and $1,602, or $25 to $50 per hour. 

If you aren’t able to move in immediately, calculate the costs for storage of your possessions and hotel or rental living if needed.

Storage costs ($110 to $225 per month) and hotels ($133 per night)

Average storage costs range between $110 and $225 per month, depending on size and whether or not you rent a climate-controlled space.

The average hotel cost of $133 per night varies, of course, by location and the caliber of the hotel.

Repairs, maintenance, and upgrades: $2,994 and up

Home repair and maintenance costs an average of $2,994 annually, based on 1% of home value of $299,400. For home upgrades, you could spend a lot less or a lot more — $345 to $13,000 depending on whether you just want some new furniture or an entirely new deck.

In a 2017 study, The National Association of Home Builders (NAHB) found that new homeowners tended to spend about $4,000 more during the first two years after buying than existing homeowners.

Some big-ticket items include appliances — especially clothes washers and dryers — and lawn maintenance equipment. A new home often also means new furniture. According to the NAHB report, during the first year of homeownership, new homebuyers spend on average $687 on living room chairs and tables, $345 on kitchen and dining room furnishings, and $634 on bedroom furniture, including mattresses and box springs.

Average costs of some home upgrades include:

• Wood deck: $13,330
• Kitchen island: $4,500
• New hardwood flooring: $4,240
• Bathroom floor: $3,600

Emergency fund: $15,073

Most financial advice recommends that you have at least three months’ worth of expenses saved in an emergency fund. Based on a median household income of $60,293, that works out to $15,073. A February 2019 survey by Bankrate, though, showed that only 3 out of 10 Americans actually had more money in an emergency fund than in what they owed in credit card debt.

The grand total: $28,744 to $43,774

When all of this is added together, the average amount of money you need to save to buy a house falls somewhere around $28,774. This amount includes some cash reserves, but not a significant emergency fund. If you add a $15,000 emergency fund, the number goes up to $43,774.

All in all, buying a house will likely be one of the largest purchases you’ll make in your lifetime. But with solid planning, research, and number crunching,  you’ll be able to figure out how much you need to save to make your homeownership dream come true (and still have a little something leftover.)

Header Image Source: (Michael Longmire / Unsplash)

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