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Are You Financially Prepared?
There is usually a good reason for the steps involved.
Before you jump headfirst into home ownership take a look at your whole financial picture. No one can do this but you. No one else will care how the purchase of a home will affect your particular situation the same way you will.
What Are Your Spending Habits?
Most people have a spending pattern. They earn an income each month and either spend all of it, some of it, or maybe even more then they are earning. The average American saves less then 5% of their take-home income. This is considerably less then the average industrialized country. If you intend to buy a home, it is best to be the type of person who consistently saves more than 5% of their income.
First, you need to save money for a down payment. You can try to obtain the money you need from relatives. Unless you are putting down at least 20%, most lenders will require that you have at least 5% of your own money into the purchase. With some relatives there can be strings attached to a gift, so make it clear up front if there is anything expected of you.
After you buy your home there will be additional expenses each month. If you have already developed a pattern of setting aside money to go into savings, it will be less difficult to come up with the extra money needed for these additional monthly expenses.
How Much do You Need to Save?
Most people don’t know the answer to this one. You need to have money saved for things other then the purchase of a house. Everyone should have at least three months worth of living expenses put away in an accessible savings account at all times. That is a minimum. Knowing your savings goals and planning on how to achieve them is something that should be addressed before you ever purchase your first home. Each person’s situation is different, and that makes their savings goals different also.
First Set Your Goals
You don’t need to know exactly what you want to do in the next 40 years, only some idea of what you want. Even if you are sure that you don’t want to retire, it is important to put some money aside anyway. Things can change, and it is best to be prepared.
Your Down Payment
It can be difficult in a rising home price market to accumulate enough money for a 20% down payment. In fact many loans are now available with a 3, 5 and 10 percent down payment. It is important to keep in mind though that these lower down payment mortgages have additional costs added into them.
A mortgage lender is most likely going to require you to obtain mortgage insurance if your down payment is less then 20%. PMI (private mortgage insurance) typically adds several hundred dollars to $1,000 or more annually to the cost of your loan. It protects the lender financially in case you default.
PMI is not a permanent cost. You should no longer need PMI once you can prove you have 20% equity in your property. Equity is the current value of your home minus the balance of your loan. The 20% can come from loan pay-down, appreciation, improvements, or any combination of these. To remove PMI most lenders require an appraisal of the property at your expense.
Saving For Your Down Payment
The first thing you must decide is how much money you will need and how much you need to put away each month to get there.
The type of investment you choose to accumulate your savings will depend on your timeframe for home ownership. If you plan to purchase a home within the next 5 years you will have to be more cautious with your investment because there won’t be enough time to make up for any downturns in the market. That puts any type of stock purchase or stock mutual fund out of the picture entirely.
here are other types of mutual funds?
A money market mutual fund is invested in only safe securities. You will not have to worry about losing you principal. Bank savings accounts will also pay interest but usually at the same amount or less then the best money market.
If you really want to save at a bank, shop around. Smaller savings and loans or Credit Unions sometimes offer higher rates.
If you expect to be saving for over 5 years you can look at a few other more risky investments. Specifically long-term bonds and stocks. A bank certificate of deposit may also be a good investment.
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