“I Bought a New York Apartment on a Librarian’s Salary” screams a headline. However, in your heart of hearts, you know that renting a place itself is a task let alone buying a place of your own. Getting your place requires savings, effort, and perseverance. A new home comes with a million emotions – worry, stress, irritation about saving up for the home and excitement, thrill, peace, happiness of owning a home. Looking to eliminate the negative emotions that come with saving for a house? Then, here’s what you need to do. If you are planning to start saving money to buy a house, we help you there too.
You should make a budget for the house and then for living there too. Be realistic when you are looking to rent a house. Getting a swanky place might seem easy. However, when you get down to the budgeting part, you might actually be able to afford only a studio apartment.
To make a budget, write down your income, expenses, and see how much rent you will be paying every month. The easier you are able to fit that into your budget, the better it will be for your finances. For instance, an extra $100 a month might not seem expensive. However, when you look at it as an extra $1,200 a year, you might actually be sacrificing a vacation.
Looking to buy a house? Here’s how to start saving money for an apartment or house. You need to calculate how much you can afford to pay. Figure out your debt-to-income ratio. Just add up all your monthly loan payments, such as credit card bills, student loans, car loans, alimony, child support payments, and your estimated mortgage payment. Divide this figure by your monthly income. For instance, if your total monthly loan payments come to $3,000 and your monthly income is $7,000, you’ll divide $3,000 by $7,000. The result is 0.429, or 42.9%. Lenders use this debt-to-income ratio to decide whether they should give you that mortgage. They usually consider those with a debt-to-income ratio of less than 43%. Note that if you are above that mark, qualifying for a mortgage might be difficult. You can improve your debt-to-income ratio by going for a cheaper house and making a lower mortgage payment.
Making a lower mortgage payment or paying lesser rent will help you maintain your lifestyle too once you move into your own castle. What’s a good amount? Around 25%-35% of your take-home pay is a pretty good ballpark figure to go by. Consider your utility bills, credit card debt, and other debt before deciding on this. Don’t forget that this should include your taxes, escrow, insurance, and homeowner association fees. If you have additional loans to pay off, keep your rent/mortgage at the lower end of that ballpark. You are that rare unicorn with no debt? Then, you can go up to 43% without breaking the bank and save for a house.
To cut costs when buying a home, select the mortgage that suits you. You have the fixed mortgages, then the adjusted rate mortgages, interest-only mortgage et al. A 15-year fixed-rate mortgage might help you save thousands of dollars compared with the 30-year mortgage. You need to pick the right one. Spend some time on a mortgage calculator. This will help you get your preferred monthly payment and the mortgage type that’s right for you.
Consider other costs too. You need to pay for the survey, appraisal, inspection, and title insurance for your home if you want the lender to sign off on your mortgage. This is among other costs. You may be able to include these costs in the loan amount. However, this will increase your mortgage payments.
A down payment is the amount of money you bring to the table when buying a home. You need to pay this portion of the total cost of buying a house. Why? The down payment acts as insurance for your lender. It shows them that you are committed to buying the house. You need to save for the down payment. A higher down payment reduces your monthly mortgage payment and helps you go for a shorter term so you can settle this debt sooner rather than later.
Note that most government-backed mortgages are insured by the Federal Housing Administration (FHA). These mortgages need a low-down payment of 3.5% of the purchase price. Some even get a $0 down payment loan with the help of the Department of Veterans Affairs (VA). For loans that are not backed by the government, the down payment can be up to 25%. For instance, if the apartment you want to buy costs $1,55,000, you can expect a $5,425 payment for an FHA loan. However, a conventional lender will want $37,200.
Want to save on mortgage payments after you save for a home? Make a higher down payment. Ideally, you should put down 25%, which can lower your interest rate, help you get that 15-year mortgage, and not worry about private mortgage insurance (PMI). PMI is a fee that comes with your monthly mortgage payment if you put down a down payment of less than 20%. PMI can hike your monthly mortgage payment by $50 for every $100,000 spent on a home.
At some point in time, you or your spouse will be tempted to take a luxurious vacation with the savings for your home. To protect your money from yourself, store the money saved in a separate savings account or an investment account.
First things first: Calculate what you should save each month. Track your savings and reach your goal. Look for ways to trim your expenses so you can put more money towards your down payment. Apart from investing your money in ETFs for the rent or down payment, here are a few other ideas:
Once you have your home, aim to be debt-free much sooner. This will help you save for emergencies and you will have room in your budget to save for the remaining goals that include investing for retirement, saving for children’s college, among others.
Looking for investments to start saving now? Sign up to Loved today.