How Much Money do I Need to Buy a House?
If you’re in the beginning steps of purchasing a home, one of the first questions you’ll probably ask yourself is “how much money do I need?”. The difficult part of this question is that there is not one number. The amount of money you need depends on many different things such as the price of the home, closing costs, and other fees that come with a mortgage. In this post, we assume you will be financing your home through a typical mortgage.
There are three main upfront costs when purchasing a home. The down payment, closing costs, and other additional costs such as a home inspection or chimney inspection. All of these costs will probably make you wonder how to save for a house but you can do it!
How much money do I need for a down payment?
Oftentimes, your down payment will be the most expensive upfront cost of your mortgage. You will need anywhere from 3-20% of your home's purchase price, due at closing. This gives the bank additional security, knowing that you own at least some of the home.
It’s worth keeping in mind that you can always pay more than the required down payment amount. This can save a significant amount of interest over the life of the loan. Many personal finance gurus abide by the 20% rule meaning you should not purchase a home unless you have a 20% down payment. For first time homeowners, this can be difficult to maneuver. If you are a first-time homeowner, we recommend having a down payment of anything more than 5%, and ideally 10%. If you cannot afford a 5-10% down payment, it’s time to lower your purchase price.
Why is a down payment required?
Whenever you finance a home, you must pay a certain amount upfront in the form of a down payment. Your bank required this so that for a couple of reasons. The first is so that you “have skin in the game” so you will be more likely to take care of the home and not leave it in disrepair. The other reason is to provide some protection for themselves if you stop paying your mortgage. That money can be used as leverage for the bank in this situation.
When is my down payment due?
Your down payment is due at the time of closing. It will need to be in the form of a cashier's check from one of your approved accounts. It’s a good idea to consult your mortgage broker or bank if you have any questions.
How much money do I need for closing costs?
Closing costs can vary depending on your mortgage. It’s safe to assume that they will be around 3-5% of the purchase price of your home.
What are closing costs for?
Closing costs cover a wide variety of administrative items. Getting the title transferred to your name, underwriting fees, loan origination fees, and credit checks are all things covered in your closing costs. These costs will be detailed in your mortgage documents.
When are closing costs due?
Identical to your down payment, closing costs are due at the time of closing. Usually, they are bound together with your down payment, but it’s always wise to double-check with your mortgage broker or bank.
Closing costs can be financed
All the upfront costs of a mortgage can add up, and banks know this. Oftentimes you can choose to finance your closing costs into the mortgage. This will increase your monthly payment and cost you a significant amount more over the life of the loan, however. Our advice? Only finance closing costs if you have too, or purchase a less expensive house so you can avoid this.
Whenever you think about financing, you will usually pay 100% (or more) in interest on a 30-year mortgage. For example, if you finance $5,000 in closing costs for a 30-year mortgage, that will cost you $5,000 in interest, plus the $5,000 principal. Always keep this in mind!
How much money do I need for other costs?
Before you purchase your home, presumably, you’ll need to get it inspected. Cracked foundations, leaky basements, or malfunctioning electrical outlets are all things that can be discovered during a home inspection. You can then use this as leverage to either get the items fixed or ask for an amount at closing to cover the repairs yourself.
Home inspections vary in price depending on your home size and location. Plan to spend anywhere from $600 – $1,000+ on your home inspection, but it’s always a good idea to shop around. Many offer the same service but you may find that one is a hundred or so dollars cheaper.
You can also pay for additional inspections, such as a chimney inspection (if applicable) or radon testing. These are recommended but not as necessary as a home inspection.
Why get a home inspection?
Like we mentioned before, home inspections cover many things. They are meant to help you find any large problems before you purchase the home. You can expect them to take a few hours as the inspector combs through the home looking for any signs of disrepair.
When is payment for a home inspection due?
Typically, home inspectors will charge you the full amount at the time of the inspection. Be prepared to pay these costs before closing.
The costs of purchasing a home can add up. Your down payment, closing costs, and other hidden costs need to be considered when purchasing your next (or first!) home. Ultimately, the amount of money you need to purchase a home depends on several factors. Your down payment can range anywhere from 3% to over 20%, your closing costs average around 3-5%, and the other costs of purchasing a home can be estimated at around $1,000. All in all, it’s best to speak with your mortgage broker or bank to get a better gauge for how much you will owe at closing.
Purchasing a new home is both exciting and stressful. Alleviate some of the stress by planning ahead and using this guide to estimate your upfront costs. Have some tips you’d like to add? Comment below and be sure to check our Beginners Guide to Real Estate Investing!