HERE’S HOW MUCH TO SAVE FOR A HOUSE

Most prospective homebuyers know they have to save enough for a down payment but may not realize they'll need even more money to get through the homebuying process, furnish their new home and keep up with potential repairs.

Here's an overview of costs you need to prepare for before and after you purchase a home.

1. Down Payment

A down payment can determine whether you can afford a home or not, affect your interest rate and influence your monthly payments. The traditional down payment goal is 20%, but there are many mortgage loans that require less.
For example, there are loan programs such as Fannie Mae HomeReady, Fannie Mae's standard 97% loan-to-value (LTV) options, Freddie Mac HomeOne and Freddie Mac Home Possible that only require 3% down, and government-backed Federal Housing Administration (FHA) loans are available for just 3.5% down. There are also more than 2,500 down payment assistance programs that can come in handy, especially if you're a first-time homebuyer.

Even without a special mortgage program, it's common for lenders to accept a down payment much less than 20%. In 2019, the median down payment for all homebuyers was 12%, according to NAR research. Breaking the numbers down further, it was 16% for repeat buyers and 6% for first-time buyers.

However, if your down payment is less than 20% you'll have to set aside funds for private mortgage insurance (PMI) in your monthly payment. The cost for PMI varies and usually ranges from .50% to more than 2% of the total loan amount.

2. Inspection and Appraisal

A home inspection, which is typically paid by the buyer, is necessary because it gives the buyer an expert opinion of what repairs might need to be made. The cost for a home inspection usually ranges between $300 and $500. The results of the inspection will often start another round of negotiation between you and the seller as far as which repairs need to be made before the home closing, and who will cover the costs.

Buyers who apply for a mortgage also pay for the appraisal, which costs several hundred dollars. The appraisal is different from the inspection because the appraiser is providing a home value analysis on behalf of the lender to make sure the home's market value is at least equal to the negotiated purchase price. It is a key part of the underwriting process for a mortgage lender to determine the overall cost of the loan to you.

Some appraisals include inspections, like for FHA loans, but the FHA also encourages buyers to get a separate home inspection.

3. Closing Costs

You should expect to pay between 2% and 5% of your purchase price on closing costs, which are settled on the date of your real estate closing. They could include a variety of fees, such as title-related costs, loan origination points, attorney fees and underwriting fees. Closing costs could also include the appraisal if you didn't pay for it upfront. You also might need to pay ahead on your home insurance premium and, if you need it, mortgage insurance.

The lender is required to share the estimated closing costs with you in two documents - the loan estimate (LE) and the closing disclosure.

If a lender allows you to roll some closing costs into the loan instead of paying up front at closing, it could help your financial situation initially, but your loan - and, as a result, your monthly payments and overall interest cost - will be larger.

4. Ongoing Costs

Depending on where you're moving from - an apartment, a parents' home or a home you previously owned or rented - some of the ongoing costs tied to a home might come as a surprise, including:

• Utility bills: Bills for electric, gas, water and trash removal will arrive every month or quarter, which will take a bite out of your budget. Assume at least a few hundred dollars in costs for a 2,000-square-foot home per month. Larger dwellings that need additional power and heating, ventilation, and air conditioning (HVAC), especially in extremely cold or hot seasons, will likely have higher utility bills.
• Homeowners association (HOA) fees: If you're moving to a planned community - such as a condo building, neighborhood of townhomes or a single-family home association - you might have to pay a few hundred dollars or more a month for HOA fees.
• Transportation costs: If you're moving from an urban area where you relied on public transportation to a suburban area that has fewer transit connections, you might have to buy or add a car to help your family get to work, school and recreation/entertainment.

5. Home Furnishings

Unless you plan to rely on hand-me-downs or use your furniture from your previous home, you'll need to budget for new furniture. You might also prefer to replace the struggling refrigerator or laundry set you inherited from the previous homeowner.

That's why people who buy a newly built home spend an average of at least $4,500 more in the two years after closing on the house than a similar non-moving homeowner, according to a study conducted for the National Association of Home Builders. For those moving into an existing home, they spent an average of $4,000 more than a non-moving homeowner.

If you're looking to furnish your home with the help of a designer, it will likely cost about $14,000 on the low end and more than $100,000 on a luxury budget, which adds thousands more to your initial home costs. And that's just the furnishings. You should also consider whether appliances need to be replaced, especially if you're revamping your kitchen or bathroom, replacing laundry sets and buying smaller appliances.

If you don't plan on working with a designer, you'll want to prioritize your most important furnishings, estimate the costs and put aside as much as possible for those items.

6. Repairs and Renovations

You might be attracted by a low-priced home in an ideal neighborhood and quickly find out why it's so affordable - an ancient furnace, leaky roof or unfinished basement. All of these projects - whether the replacement of an HVAC unit or remodeling of a basement - could cost several thousand dollars. In 2019, the median renovation spend was $13,000, according to the 2020 U.S. Houzz & Home Study: Renovation Trends.

If you haven't saved enough money to handle these major purchases soon after moving in, you have a few options to explore:

• Redirect your down payment. If lowering your down payment by several thousand dollars won't affect your interest rate and/or dramatically increase your monthly payments, you might want to use that money to buy a new furnace or air conditioner to guard against the chance of one breaking when it's least convenient.
• Pursue financing. HVAC dealers/installers and others often have financing plans that allow you to pay for the cost over a period of time, possibly with very low interest rates. Also, if you can get a home equity loan or line of credit, that might be an easy way to pay for a remodel and possibly get a tax break on the interest.
• Wait it out. You can try to save as you go and hope the roof gets through another year, then pay for it when you can.

Bottom Line

It's important for prospective homeowners to save for a variety of needs, not just the down payment. When you finally own the home of your dreams, you'll want it to reflect your style as soon as possible without putting you into extreme debt.