How to Save for a Home

How to Save for a Home

If all goes according to plan, Johnny and I would like to become home owners in the next year or two. And that would mean we’d be shelling out thousands and thousands and signing away 15-30 years of our lives. No big deal. Gulp.

Home buying is a big, big deal, people. Johnny and I have almost checked off every single adulthood-bucket-list item: start a full-time job, move, buy a car, get married, have a kid, wear Snuggies — you name it, we’ve done it. But we’ve yet to do the deed, or rather have a deed. The idea of owning a home is downright frightening, a decision we don’t take lightly.

So how do you prepare for such an event? Well, that’s up to you. But we’ll share how we’re preparing for home ownership, aka bona-fide adulthood.

Calculate What You Can Afford

What we can afford is a different calculation than the amount a bank will lend us. For each person, the calculations will be different. But a mortgage shouldn’t be a stressful monthly expense. Johnny and I plan to keep our mortgage within the range of the amount of rent we would be willing to pay. With rent and and taxes and HOA, the ideal lucky number for our mortgage would be under $1500/month.

Save 20%

In order to avoid paying private mortgage insurance (PMI), Johnny and I are planning to save up at least 20% for a down payment. Why do we want to avoid PMI? Well, it means more money out of pocket for us. Until the equity of the home is at 20%, we would have an extra expense each month. Of course, paying PMI isn’t the end of the world, and it is tax deductible if you make less than $110,000/year as a couple. But Johnny and I would like to avoid throwing away extra money when we’ll already be paying so much for a home.

Adjust Your Emergency Fund

Before we sign our lives away on a home, Johnny and I are going to reevaluate our six-month emergency fund and add to it if necessary. We’ll calculate what our new monthly expenses will be with a home, adding in a category for home maintenance, as well as a category for the actual mortgage, HOA, etc. We’ve got to make sure our emergency fund stays spiffy!

Calculate the Monthly Cost

The cost of a mortgage seems pretty cut and dry at first glance. But, nope. Additional expenses piggy back onto the monthly mortgage, and hold on tight, swearing to never let go. The cost of a 30-year mortgage might be $1300/month. But then there’s a property tax to add to that number. And home-owner’s insurance. And HOA. And suddenly you’re looking at a $1700 monthly expense. Boooo.

Consider Other Expenses

And if all that wasn’t enough to wrap our heads around, Johnny and I are also taking into consideration the other additional costs that come with home ownership. If we have a lawn, we’ll need to maintain it, which means owning a lawn mower and such. And if our microwave suddenly starts making zaps and pops and glowing from the inside every time we try to cook something, we’ll won’t have a landlord to run to for a replacement.

Also, the initial costs of moving in are sure to add up. We may want to paint this, or redo that. Or maybe we’ll need to buy a washer and dryer. Or a “Beware of Vicious Kitty” sign to put up in our front yard. You never know what you’ll have to get. But you’ve gots to make sure the money’s there for it.

I make home ownership sound like one big ball of fun, don’t I? You’re all probably giddy with excitement about owning one. All those extra expenses, just for me? Where do I sign?! Okay, so maybe it’s the exact opposite. I’m sorry! I’m like your best friend. The one who tells you the truth when you ask if your shirt makes you look pregnant. And it kind of does from certain angles or when the wind is blowing, so don’t wear it ever again. Or until you actually are pregnant. In all seriousness, I’m just trying to get real about owning a home and tell it to you straight.

Johnny and I try to remember that no one is forcing us to become homeowners. We’re going to take all the time we need for us to be ready. And we won’t buy unless we’re certain we’ll be in an area long enough to do more than just pay the principle on our loan (which usually means sticking around at least 3-5 years). And despite all the extra expense and responsibility that comes with home ownership, we’re still very excited for when we’re ready to take the plunge! It will be great to have a place to call our own.

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  • Reply Jordann @ My Alternate Life July 3, 2013 at 8:12 am

    All of the expenses you just outlined are basically all of the reasons I don’t want to buy a house! Where I live, buying a house is considered the next logical step after one obtains a steady job, and it’s tough to explain to people that I’m not looking for that kind of commitment right now.

    That said, can’t wait to live vicariously through you guys, good luck with saving for a house!

    • Reply Johnny August 6, 2013 at 12:48 am

      A lot of our friends and family followed suit with the next logical step thing, but we’re holding our ground. We usually just tell people the truth: we want to relax for a few years before saying hello to the Debt Monster again. It’d also help if we could move somewhere and stay there for more than a year or two. 🙂

  • Reply Michelle July 3, 2013 at 8:23 am

    There are a lot of housing costs that a lot of people don’t realize when they buy a home. One of my friends is just realizing this… And she already bought her home. AH!

  • Reply Rob July 3, 2013 at 9:08 am

    Many moons back when we were around your ages we bought our first house, after having rented an apartment for 3 years (which I hated every minute but endured – lol). Once we bought our house then we started our family. A few other considerations regarding house buying:

    #1 location, location, location – we looked for a house close to schools, shopping and public transportation (in the event that our one car should be in the shop for repairs). Remember, when you buy that house, always consider how attractive it will be when, years later, you want to sell it. And sell it you will as you gradually upgrade your lifestyle and your family increases in size.

    #2 what kind of house to buy – this is a personal choice but just remember that nature abhors a vacuum and no matter what size of house, you will eventually fill every room ! 🙂
    The other consideration here, and again there’s pros and cons, is whether to buy a new house or a resale (which someone else has previously owned). Personally, we decided to go the resale route – preferring an established neighborhood and at least a 5 y/o house that already had the initial builders glitches all fixed.

    #3 signing up for a long-term mortgage – actually it’s a series of mortgages as you move up (or down) from house to house, hopefully building up equity as you go. Over the years I used to also, whenever possible, throw a few $$$ at prepaying down the mortgage principle, thereby achieving guaranteed interest savings. You have to realize that the reason that we did this was that interest rates were many times higher back then as compared to now and, living here in Canada and unlike the US, PMI has never been tax deductible.

    All that said, I know how much having a place of one’s own can mean to one’s lifestyle and happiness so good luck and I’m sure that you’ll both do just fine.

    • Reply Johnny August 6, 2013 at 12:51 am

      Good points, especially buying a fairly new, but not brand new home. Having just moved from an almost brand new townhouse and seeing the number of builder errors and mistakes, I definitely think a resale is a smarter bet.

  • Reply J.Mill July 3, 2013 at 9:12 am

    Excellent points!

    One big factor that my husband and I considered when we bought our home in Chicago in September last year is the interest rate on our mortgage.

    We, like you, were determined to save until we had 20% to put down. We kept out ear to the ground and found a home we loved and that was really affordable AND was in what was called the “Brooklyn” of Chicago (up-and-coming = will be worth more in the near future!). But we didn’t have our 20% yet.

    We thought about waiting for a full down payment and taking our chances on interest rates, but it didn’t makes sense for us. We were going to pay a 3-digit number in PMI until we got to 20% equity, but we’d not lose a big 4-digit number if we waited and lost our awesome interest rate!

    I know that you can’t perfectly predict what will happen with interest rates, but when we noticed them trending up we jumped on the house that we wanted anyway. Our mortgage is easy for us, our home value is already trending up and we’ll be done with PMI within 2 years.

    Good luck guys! And have fun!

    • Reply Johnny August 6, 2013 at 12:57 am

      Such a great point. Clearly we have our dream scenario painted up, but I’ve got a sneaking suspicion things might not work out that way. And the rising interest rates certainly have our attention. Lucky (or unlucky) for us, we’ve been so transient the last year or so that we haven’t even been stable enough to consider anything.

      Congrats on the house! So great to hear others’ success in such a daunting/exciting process. Enjoy homeownership for us until we take the plunge!

  • Reply Chris @ Amplify July 3, 2013 at 9:57 am

    Sound advice, guys.

    As a current home owner, I would say try and save additional money for after moving in. We were able to get credits for some improvements around the house, but we moved into a house that hadn’t been occupied in 18 mos. so it needed some TLC. Also, spend the money for a solid home inspector.

    I would also recommend that anyone looking to buy a house watch HGTV (I have no affiliation). I can’t remember the name of the show but it’s about first time home buyers. The shows raises some legit issues to consider when buying a home that cost people a lot of money.

  • Reply Mrs PoP @ Planting Our Pennies July 3, 2013 at 10:13 am

    Another good reason to save up 20% is that while PMI is currently deductible, this requires a yearly extension from congress and was only instituted because of the rough housing market. As housing recovers, I would expect that deduction to disappear. (Not to mention a lot of people don’t have enough deductions to make it worth while itemizing…)

    And don’t assume that HOA is a necessity. I don’t know anyone who lives in a HOA that doesn’t hate it and the expense and headaches it causes. We love our non-HOA neighborhood =)

    • Reply Johnny August 6, 2013 at 12:59 am

      We’ve never paid for our HOA’s and we mostly hated them still. 🙂

      There are a few planned communities in a few areas we’ve lived that we thought we might consider if we were in the market, and of course, they’re HOA’s. I imagine they’re sorta hit or miss, but I’m thinking they’re mostly miss.

  • Reply Renee s July 3, 2013 at 10:13 am

    I was recently looking in to purchasing a house and I was also reading a lot of finance blogs (of course). The rules are changing with PMI and it goes into effect this summer (you have to have bought your house by august is what I heard). The new rules are the PMI will stay with you for the entirety of your mortgage! Not just when you get 20% equity. For those people who bought their houses earlier, they still go by the old rules, but for new homeowners things could be different. Scary, right?

    • Reply Meghan July 5, 2013 at 4:08 pm

      That’s for new FHA mortgages only. There are plenty of private insurers who will allow you to drop PMI, though you have to get an appraisal and it’s a little bit of a hassle. PMI for someone with good credit is .6% a year, so if interest rates were to rise by more than that (and they already have and will continue to do so), you’re better off with the low rate and PMI. I wish I could buy right now but I don’t have the 5% down payment yet.

      • Reply Johnny August 6, 2013 at 1:01 am

        Thanks for the clarification, Meghan. And in the long run, lower interest rate definitely trumps PMI.

        Apart from avoiding PMI, I think we’ve always like the 20% number because it means we’ve got some serious skin in the game and we can’t make the decision lightly. That’s not to say others don’t take it lightly, but it’s a number we’ve been able to get our heads around in thinking, “Woah, this is a serious commitment. We better be sure of this one.”

  • Reply Chris July 3, 2013 at 10:24 am

    I want to buy a house…but then I remember that no, no I don’t. I was listening to the Lifestyle Business Podcast (great podcast if you’ve never heard of it) and they were talking about buying a house and a few other personal finance topics. I recommend listening to their recent episode 162. I won’t reiterate what they said since I couldn’t do it justice.

    I got prequalified to buy a year ago and decided the moment I walked out of the mortgage broker’s office that I wasn’t going to buy a house. Buying a house seems so permanent. I’ve been saving up for one since then so that when the time comes I will be ready, but lately I am looking at that money less as a house fund but more of a general fund. I’m obviously incredibly indecisive lol.

  • Reply Miranda July 3, 2013 at 10:29 am

    You guys pretty much hit the nail on the head with this one, but truth be told, as scary as it all can be, it’s also REALLY FREAKING AWESOMELY EXCITING. Enough so that you tend to gloss over all the not-so-pleasant financial stuff. Kind of like pregnancy and giving birth. When taken out of context it sounds pretty gruesome (I’m gonna push a what, outta my what??), but when they hand you your new bundle of joy (keys) and you dance around your empty living room, make carpet angels, and yell echo-y nonsensical phrases down your bare hallway, you are totally not thinking about your freshly emptied savings account. (Except having a baby is way harder and way more exciting, (totallynotcomparingahousetoababyatall)…

    That being said, we are about to sell our first home. We just got an offer from someone yesterday…for CASH! We’re 99.99% sure we’re going to accept. After we got the call last night, we were talking about how incredible that feeling must be, to just lay down $100k+ and just be all like, “I’ll take it” and slowly pimp walk outta there….

    • Reply Johnny August 6, 2013 at 1:04 am

      Hahaha. I’m actually totally okay with the baby and house purchase comparisons. Joanna might beg to differ since she was the one who had to go through all that stuff. But I’m cool with it. And I would totally pimp walk out of a cash purchase on a home.

  • Reply Alice @ Earning My Two Cents July 3, 2013 at 10:40 am

    Oh this is so apropo. I have totally been bitten by the home buying bug. The prices in my new city are sooooo cheap and I really want to nest. But then the practical side of my brain reminds me of all the things you listed (except for property taxes, I always forget about property taxes) and the fear of moving into a home without an emergency fund kicks in and I panic. Yeah, its just time now to learn about the home buying process and save, save, save.

  • Reply Kurt @ Money Counselor July 3, 2013 at 11:46 am

    Try to be patient enough to save up a 20% (or more) down payment so you don’t have to pay for that ugly private mortgage insurance. What a rip-off!

  • Reply Liam Helmut July 3, 2013 at 11:52 am

    You live in Cheapsville! PITI of just $1500? Here in the Bay Area, that will by you a port-a-potty you have to hide in the back corner of the Walmart parking lot. I am jealous.

    • Reply Johnny August 6, 2013 at 1:05 am

      Hahaha. But I bet that’s one fancy looking port-a-potty with a magnificent view of the Golden Gate Bridge, amiright?

  • Reply E.M. July 3, 2013 at 1:43 pm

    Excellent points – a lot of people don’t tend to take the “extra costs” into consideration when looking to buy a house. They think they can afford the monthly payments for their mortgage and don’t go further than that, but it takes a lot more to run a house! As you said, all the bills that come along with it, tools to keep things maintained, and property taxes (they are the worst here) all need to be taken into account. It’s a huge responsibility and one I am nowhere near ready for!

  • Reply Grayson @ Debt Roundup July 3, 2013 at 3:24 pm

    I remember when all of the extra expenses hit us when we first bought a home. What a whirlwind. We are working on saving up for all of that crap now for when we purchase another home.

  • Reply EcoCatLady July 3, 2013 at 5:10 pm

    Gosh… well, I bought my house in 1995 and should have it completely paid off before the end of this year. I wish I’d started earlier with the extra principal payments because I would have had it paid off much sooner but, oh well… Owning it outright will mean much more financial freedom than I already enjoy.

    Anyhow, I think my advice to you would be to figure out where you want to settle first, move there and rent for a few years to make sure it’s where you want to be. Then take your time house hunting until you can find something that is both right for you and a good deal. Perhaps this is old fashioned of me, but I’ve never really understood the idea of chasing a job around the country. It seems like your life should come first and your job is secondary… but maybe that’s just me.

    I’m also not a huge fan of the serial home buying game. It seems like it just keeps you locked into bigger and bigger mortgages, and you become a bigger and bigger wage slave as life progresses… just not my idea of fun! Plus, if you just own one house, then your focus can be on making it the right house for you and your family, not on resale value and all that other crazy stuff.

    I dunno… maybe my ideas just aren’t practical in the “modern world” but when I look around at all of my friends who are working themselves into the ground just trying to keep their heads above water, it just seems crazy to me. I earned a very, very modest salary back when I had a “real job” (if you can call running a non-profit folk music school a real job,) but I saved my money and got to quit working and support myself through “hobbies” by age 39. And now at age 46 my house is nearly paid off, and my time is pretty much my own. Maybe I’m the crazy one, but I sure wouldn’t want to trade places with any of those “normal people!”

    • Reply Meghan July 5, 2013 at 4:09 pm

      I agree!

    • Reply Johnny August 6, 2013 at 1:08 am

      After reading your successes, I think Joanna and I will peace out normalville and join the crazy folks. We both have cats so that’s a start.

      And congrats on almost being done paying off your mortgage. Can’t imagine what a wonderful feeling that will be.

  • Reply Jane Savers @ Solving The Money Puzzle July 3, 2013 at 9:45 pm

    I keep budgeting for extra maintenance costs but something always needs replacing or fixing. I have a list of home repairs with must dos at the top down to want to do.

    Right now a foundation repair is at the top and upgrading my ugly 80s bathroom is at the bottom. The list is always long and growing.

    • Reply Jane Savers @ Solving The Money Puzzle July 3, 2013 at 9:47 pm

      But don’t let my never ending to do list put you off. I highly recommend buying a house as a way for spenders, like myself, to keep their money locked up where they can’t touch it until they are very old and need it for retirement.

  • Reply Halsy July 5, 2013 at 8:11 pm

    I think it’s great you are not rushing into home ownership! We bought a house within a year of being married and graduating college…6 months before housing market crashed. We planned to be in the starter home about 3-5 years…or until a baby came along. Well we have lIved here over 5 years and have a 1 year old but dont want to loose too much $ if we sell. So we are kind of stuck. Thankfully we live in one of the best school districts in our state so we didn’t loose as much home value as others. We live in a neighborhood that has a lot of older homes and people that have lived there since they were built so some houses have been
    Selling for about $50-$100,000 less than valued! Ugh! Home maintenance can really add up especially in older houses!

    • Reply Johnny August 6, 2013 at 1:10 am

      Ugh, that’s rough. But it sounds like you’ve found some positive things to focus on. And after all, you are living in a house. Your very own house. Hopefully you can wait it out a few more years and get closer to your purchase price before moving on up and out.

  • Reply Becky @ RunFunDone July 6, 2013 at 11:44 pm

    Ah! I just got a new job in our area, so now it’s time to buy! (Prior to this job, we didn’t know if we’d be staying in the area or moving). We’d love to have a 20% down payment, but with housing prices going up, and interest rates going up, it really seems like NOW is the time to buy, rather than waiting the year it would take to get 20%. FYI: I’ve been doing some research since we’re moving in that direction. (We just started working on pre-approval for a loan this week), and word on the street is that while it USED to be that once you reached the 20% point on your loan, you could get rid of the PMI, now that’s not necessarily the case, and PMI sticks around for the life of the loan. Some banks are now offering piggy-back loans to help consumers out with that – so consumers can take out a mortgage for 80% of the loan and an “other” loan for whatever else they need so that they don’t get stuck with PMI for the life of the loan.

    I seriously feel like I’m in way over my head trying to figure out this process! I told one bank last week that I’ll be switching jobs in November. I thought that would help, because my income will jump by $20,000 when I change jobs, but it turns out that changing jobs scares loan officers a lot (even if a contract is already signed), so it’s better to just pretend that I’m staying at the current job! You live and you learn!

    • Reply Johnny August 6, 2013 at 1:15 am

      Man, what a process. That lifetime PMI thing sounds terrible. And kinda scary.

      I’m at a loss for why a higher salary job switch would scare loan officers, but I imagine they like consistency and knowing that you’ll work for Corporation Inc. for the next 50 years. But that’s just not the reality anymore. Corporate ladders and lifetime employees are as prevalent as pensions, so maybe the loan officers should just look beyond a job change and see the big picture of someone’s financial wellbeing.

      • Reply Becky @ RunFunDone August 6, 2013 at 9:16 am

        I went to a first-time homebuyers class and got educated: If you have an FHA loan (e.g. are putting 3.5% down), then PMI sticks around for the life of the loan. However, for conventional loans it disappears once you reach that 20%. However, I can elect to pay less for PMI each month, but then keep PMI for the life of the loan. (Super dumb idea, but it was offered to me). My bank ended up working with me even though I”m changing jobs! It just took longer while they figured it out!

        • Reply Johnny August 6, 2013 at 5:06 pm

          Awesome! Glad to hear it worked out. And thanks for edumacation on PMI. Would still love to avoid that thing altogether, but we’ll just have to see what interest rates are doing when we’re on the house-hunting prowl.

  • Reply Nate July 9, 2013 at 9:47 am

    I’m gonna diverge from the pack here and suggest that you not buy a house but buy a duplex instead and rent the other half. This is not nearly a scary as some people think and it will allow you to make huge equity and cash flow really fast. I wish I had done this before buying my first house. Check the numbers and you’ll see the advantages. I’ll tease you with one thought…If you are thinking about $1500/mo. in costs now imagine what it would be like to have $300/mo in costs after your tenant pays the rent. Feel free to send me an email if you want to talk it out some more.

    • Reply Johnny August 6, 2013 at 1:17 am

      I actually really like this idea. I’d love to bring in some income to make up some of our mortgage payment every month. I’m not crazy about having a neighbor live next to/under/above us like we’ve done the last 6 years in our apartment living, BUT it would really make the process less scary.

      We’ll probably be in touch. Thanks for the suggestion/comment.

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