Buying a house is a big deal — there’s no denying that. And because it’s so big, some of us may put it completely out of our minds until we’re actually ready to take that step. But is that such a good idea? Sure, it’s important to focus on your pressing financial tasks at hand, like paying off student loans and, you know, buying food — but there are also benefits to getting the ball rolling on saving for your first home as soon as possible. Whether you know when you want to buy a home or not, here’s why it’s a good idea to start preparing for it now.
The cost of home buying is more than the down payment
When you buy a home, you calculate the down payment you’ll pay based on the list price — but it’s important to keep in mind that the costs of home-buying are more than initially meet the eye. “Beyond the down payment, there are associated closing costs, moving costs, homeowners insurance and possibly a renovation budget if you need to make any updates to the home,” said Julia Wang, vice president of content at ValuePenguin. These are “things you don’t necessarily think about or plan for as a first-time home buyer.” As thorough of a planner as you may be, when it comes to large purchases like this, there are bound to be unexpected costs — and the sooner you start saving for them, the less of a blow they’ll deliver.
There are benefits to a larger down payment
The amount you’re required to put down in order to secure a loan varies by lender and type of loan; but Wang pointed out that according to the National Association of Realtors, homebuyers in 2018 paid a median 13 percent down payment. First-time buyers went lower, with a median of 7 percent. “There are many affordable programs that allow qualified individuals to achieve homeownership with little money down,” said Peter Boomer, a mortgage executive for PNC Bank. Indeed, according to NerdWallet, there are many types of loans and lenders that make it possible for you to buy a house without the oft-mentioned 20 percent down payment — and those options can certainly be a great way for people to purchase a home while still managing their other daily expenses.
That said, there are benefits to making that 20 percent down payment if you can. “When you put down 20 percent, most lenders won’t require you to pay private mortgage insurance (PMI) [which is a premium you pay to protect the lender in case you don’t fulfill your loan payment obligations] and you’re more likely to be offered lower interest rates on your mortgage. So it really comes down to savings.” If you allow yourself lots of time to build those savings, you may be able to take advantage of the benefits of a higher down payment.
You’ll be financially prepared when the time comes
“If we take a look at the median home purchase price — $250,000 — a first-time buyer putting down 7 percent down payment would need $17,500 in savings to secure a mortgage,” Wang said. But according to ValuePenguin, the median savings for Americans under 35 is $2,000. The median savings account balance for all U.S. households in 2016 was $7,000. Long story short: “Most of us don’t have enough in savings when we’re ready to make the leap from renter to homeowner,” Wang said.
But if you start saving before you’re actually ready to buy, you’re less likely to be one of those people. “Even if you’re at the beginning stages of thinking about purchasing a home, give yourself at least two years to get your finances lined up,” Wang said. “In that time, you want to pay off outstanding debt, elevate your credit score and build up your savings.”
So, how do you actually do that? “Start with building a budget and understanding your spending habits,” Boomer said. “There [are] a wide variety of tools out there to help consumers determine budgets and needed savings,” he added, noting PNC has such a tool.
And while home prices are always subject to change, Wang suggested doing some initial research. “If you know where you want to eventually put down roots, research the median home prices in that area and take 20 percent of that value to determine a target savings number you need to work toward,” she said. “Put yourself on a schedule and timeline to have that money saved by the time you are ready to make the leap.” Once you know how much money you want to save, you can work it into your annual budget and figure out how much you can set aside each month.
You may be able to set aside tax-exempt money
You can put the money you’re saving straight into your usual savings account; but before you do, see if there’s a better option. “Some states offer First-Time Home Buyer Savings Accounts, or FHSAs, to help home buyers save for their first home purchases on a tax-advantaged basis,” Wang said. “The pre-tax money in this account can be used for down payments and other costs associated with home ownership.”
While the FHSA can save you significant tax costs on your home purchase, it’s important to make sure the funds you’re putting into the account will only be for that use. Per ValuePenguin, if you withdraw the money for another purpose, you’ll be taxed on it and charged a withdrawal penalty (the exact amount varies by state). Only a handful of states have FHSA programs, but it’s worth it to check if yours is one of them when you’re ready to take that step.
Being a homeowner can continue to benefit you financially
There’s no question that buying a home is a major purchase, but it’s one that can benefit you financially in the long run. “Home ownership continues to be one of the best ways for individuals to build wealth,” Boomer said.
Indeed, while Wang pointed out that mortgage interest rates recently reached an eight-year high and the housing market is very competitive in some cities, many people still find value in home ownership. “Your home will likely be your biggest financial investment; and depending on where you live, it could be your biggest asset as well,” Wang said, later adding, “If you think you’re ready, it’s a great way to build equity. Instead of paying rent (money you’ll never get back), you’re putting money toward your home; which in theory, you’ll recoup once you sell your home.”
That said, Wang noted the decision to buy shouldn’t be taken lightly. “The decision is more complex than whether you can financially afford a home, but whether you’re emotionally ready to take that step and embrace all the associated responsibilities and cost that come with home ownership,” she said. Those responsibilities include paying not only your mortgage, but also all of your utilities; and handling any issues that arise (when you’re the owner, there’s no landlord or super to call if the dishwasher breaks). Take time to do research — taking into account your personal financial circumstances — to determine if it’s better to rent or buy in your city before you take that step.
Saving is beneficial, even if you don’t buy
Beefing up your savings account is a good idea — even if you don’t ultimately use the money the way you thought you would. “The idea of saving up for a rainy day may sound clichéd, but without savings you put yourself at financial risk — of not building equity (for example, by purchasing a home), of not having an emergency fund for unplanned expenses (the loss of a job or even an unexpected medical expense) and of not having enough in retirement savings for your golden years,” Wang said. “The key is to start saving early — as soon as you you land a job — by putting aside what you can afford.”
The bottom line? “The future is something you can never predict,” Boomer said. “There will be opportunities and obstacles that present themselves. Having a savings plan allows for individuals to reduce the stress of the unknown and take advantage of opportunity when it knocks on your door.”