(Blog post credited to BrightPeakFinancial)
Buying a house requires a real understanding not only what you hope to have but what you can afford to do. These 5 steps not only helped us save for a down-payment on a house, guided our journey and saved our sanity; they also allowed us to do so without draining our savings accounts or creating credit card debt.
1. Start saving well in advance of your purchase.
Scott and I knew that we wanted to buy a house with a nice big yard for our two dogs, so we started planning with a dedicated savings account for over a year before we “allowed” ourselves to even start looking. We wanted to make sure we were saving for a goal and not a specific home to avoid scrambling for money in a pinch because “we just couldn’t lose out” on a place.
2. Determine your ideal area(s) and contact the city about property tax.
I can’t tell you the sticker shock we got when we saw how much this varies from city to city. You might set a budget of $200,000, but not every $200,000 home will have equal monthly payments. One area could have $3000 and one area $5000 a year for property tax, and that difference means a monthly payment difference of $166, which could change your mind on a home altogether.
3. Decide what mortgage type is right for you to determine your down payment amount.
You can go with a conventional mortgage or an FHA mortgage, and each has pros and cons. Conventional mortgages generally have higher interest rates and lower mortgage taxes, as well as the ability to eliminate mortgage tax when 20% of the principle is paid down. FHA offers lower interest rates with slightly higher mortgage taxes, but also offers reduced closing costs. Decide on the mortgage that is right for you and work with a loan officer to decide what you can afford to put down up front. With a number in mind you have to save, save, save!
4. Look at your spending and decide where to “trim the fat.”
After long days you might be tempted to eat out, but remember that the $50 you are spending on dinner could (and should) be put towards the down-payment of your home. Remember that in Step 3 you decided what you can afford to put down, so each time you are tempted to spend, get back to a vision of you in your new home. For example, every time I was exhausted and wanted to grab some take out, I pictured my master bath retreat and how much happier that would make me than a quick meal!
5. If you don’t have it, don’t spend it.
I cannot stress enough how important it is to hide your credit cards from yourself as you save up to buy a house. It might seem simple to just charge it when you want it, but remember you are putting your name on a huge dollar amount of debt when you take on a mortgage. If you want some great savings tips, this article provides great savings tips and ideas.
Hopefully this information helps in your home-buying process!