Saving for your first home

Now is a great time to purchase a home, as long as you do it responsibly. Lots of people are looking to start saving for a home. Here are  a few things to do before looking to buy a house:

1. Pay off your debt

2. Set up emergency savings with three to six months of savings in it.

3. Save up a down payment

I know houses look really attractive right now, but do not get into more debt before you are financially secure. I do not want to see you lose that house because you have an emergency pop up a few months after you purchase your home.  Plus, with credit tightening, you’ll want to have a sizable down payment. I know it sounds like a lot of money but you should really think about putting 20% down. It won’t take as long as you think.

Most people who purchase a home have a larger payment than the rent they currently pay. There are also a ton of expenses that come along with owning a home (property taxes, insurance, utilities, sewer fees, upkeep, possibly condo or association fees). Figure out how much it will cost you each month if you purchased a home.

Let’s use an example: Say you want to purchase a $150,000 condo. The monthly mortgage payment on the full balance (at 6% for 30 years) would be $900 a month. The reason I’m using the full balance is to give you a cushion. Now, you’ll have to consider property taxes and insurance. Talk to friends and family to see what they are paying. For property taxes, you can look up similar properties on-line at the town assessor’s office website. Most of these sites will have calculators or actually tell you what the property taxes are on a particular house. Let’s estimate $1500 a year for property taxes and $600 a year for insurance. That’s $175 a month for escrow. Now, your payment is $1,075.

If you purchase a condo or a home in an association, you’ll have condo fees or association fees. You can call local condos or ask a realtor to estimate condo fees for you. Add that into the payment also. Say $150 a month for fees. We now have a payment of $1,225.

Now look at utilities. The best thing to do is to ask your friends and family about this or if you know a realtor, ask him. The type of heat you have can make a huge difference in your monthly heating bills. In Connecticut, we have funky weather. About the time we turn off the heat, it gets so hot that you need to turn on the AC. We’ve been lucky this year and haven’t had to turn on the AC much this year. Our utilities (gas, electricity, cable, internet, phone, water and trash fee) run us between $300 in the fall and early spring to $450 a month in winter and hot summer months. Plus, we keep our house really cold in the winter. Heating in some areas of the country can cost you $300-$400 a month. Make sure you budget for this, especially if you are in an apartment where heat and hot water are included. Let’s add $400 a month for utilities. We now have a payment of $1,625 a month.

Do not forget repairs and maintenance for the place. Depending on the condition of the home you buy, you’ll need to put aside a good amount of money each month. You may need to budget 10-20% of your mortgage payment each month for repairs and maintenance. Saving this amount each month will allow you to budget for major repairs that you might need to do down the road as well. Let’s budget 15% of the $900 payment or $135 a month. We now have a total monthly cash outlay of $1,760.

I know what you are thinking. Kristin, this is insane. It won’t cost me this much to own a home. I can tell you as a homeowner and as someone who works with a lot of homeowners, that it really does cost this much to own a home. A lot of experts will tell you to double your mortgage amount each month to cover “other expenses” like the ones I just discussed.

Now, we start to save. Say your current rent, utilities and renter’s insurance now costs you $900 a month. Since you’ll need to be able to afford $1,760 a month in order to get the house. Start by making those payments now. Take the $1,760 less your current living expenses of $900 and throw it into a savings account. That’s $860 a month toward your own payment. In less than 3 years, you can save $30,000 or a 20% down payment.

Using this method serves two purposes. First, you are saving a down payment for your home. Second, you have shown yourself that you can make these payments each month for three years and that this purchase will fit into your budget. You can always save more than the payment above, but if you find that you can’t make these goals each month, you can’t afford a house in that price range. You’ll need to consider cutting back or waiting longer and saving more to put down a larger down payment.

Homeownership may be within your reach. Take it slow and do it in a financially responsible way.